What Your CPA Wants You to Know

99. The Tax Strategy Your CPA Never Told You About! The Augusta Rule

• Carson Sands, CPA & Teran Sands, MBA.

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The Augusta Rule offers a legal way to transfer money from your business to yourself tax-free by renting your home to your business for up to 14 days per year. This often-overlooked tax strategy allows business owners to deduct the rental expense from their business while receiving tax-free personal income.

• Rent your personal residence to your business for up to 14 days annually without paying personal tax on that income
• Your business can deduct the rental payment as a legitimate business expense
• Determine fair market rent by researching comparable event spaces in your area
• Create and maintain a formal rental agreement between yourself and your business
• Document each use with invoices and calendar entries
• Pay yourself from your business account using traceable methods (transfers, checks, digital payments)
• Monthly strategy sessions are ideal for implementing this strategy while staying under the 14-day limit
• Take photos and keep notes from meetings as supporting documentation
• Rental payments of approximately $1,000 per day are typical, depending on your location

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Speaker 1:

and you can rent your home to your business for up to 14 days per year. Your business deducts it as a legitimate business expense. You don't pay personal taxes on that income either.

Speaker 2:

Welcome to what your CPA Wants you To Know.

Speaker 1:

Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.

Speaker 2:

I'm Carson Sands.

Speaker 1:

And I'm Taryn Sands.

Speaker 2:

I'm a CPA with over 10 years of experience helping people start and grow their businesses.

Speaker 1:

And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.

Speaker 2:

We're here to share everything your CPA wants you to know in a fun and easy to understand way. Let's get started.

Speaker 1:

Let's do it.

Speaker 2:

Welcome back to another exciting episode of what your CPA Wants you To Know.

Speaker 1:

We have another tax saving tip for you.

Speaker 2:

Just what you've been dreaming about.

Speaker 1:

This is kind of boring to talk about, but so important because you definitely need to be doing this in your business if you are not.

Speaker 2:

Right, it's just free tax savings.

Speaker 1:

Yeah, and every little bit counts. I tell this to people all the time because I say, oh, you should do X, y or Z and they're like, well, that's not that much money. That's only like you know however much thousands is saving them. Then what is it actually saving them in taxes? You know, I'm like, yeah, but every little thing that you do really adds up. So if you're listening to some of these, you need to do all of them.

Speaker 2:

That's how people really save themselves a lot of taxes. Yeah, and if you do all of the little tricks we say, it almost always saves you two or three times what you pay us. So I mean it's totally worth it.

Speaker 1:

Absolutely. Today we're breaking down a tax strategy that most people actually have not heard of, but once you do, it's like, oh wow, I absolutely need to do this.

Speaker 2:

It's called the Augusta rule.

Speaker 1:

And I bet you haven't heard of it, have you?

Speaker 2:

I bet you've heard of Augusta, if you like golf. Absolutely so, carson tell us what the Augusta rule is so that we can tell you how to use it. The Augusta rule is a special rule that allows you to rent out your personal house for 14 days or less per year and you don't have to pay tax on that rental income.

Speaker 1:

And, yes, it's 100% legal. We're telling you only legal advice on this podcast.

Speaker 2:

Now, if you happen to live at the Augusta Golf Course where they hold the Masters, then you might actually want to rent it out to just random people because you might get enough money in those I don't know that week that the Masters tournament is there to pay for your mortgage for the whole year. I'm not kidding. But let's say you're not a millionaire that has a house on a Masters golf tournament course. Then another option is to pay that rent out of your business. Well, why would you need to rent your house out, I don't know. Let's say, once a month to your business. There's a very good reason. You have meetings there, client meetings.

Speaker 2:

I have businesses that rent out tiny little rooms up at the event center all the time to host meetings or seminars or different things. Those are tiny, crappy to be honest, little rooms that cost a small fortune. When maybe you have a big, beautiful house with a great area to meet people and for that same money you're paying to that conference center or maybe even more because it's a bigger, higher square footage, much nicer finished out house, then you can pay that rent to yourself. Now how does this help you? Your business gets to deduct that rent expense but that's not taxable income to you personally as long as it's less than 14 days for the year.

Speaker 1:

So basically you're just taking that money out of your business and not paying taxes on it.

Speaker 2:

Yay, yeah, exactly. You transfer the money to yourself or write yourself a check, but instead of it being salary to you or distributions from your business or whatever, it's just non-taxable money that you get to have from the business.

Speaker 1:

So what does this look like if you don't own a golf course home and you're just trying to do this to help you save taxes? Because if people like that are going to take advantage of this tax law, then absolutely everyone should right. So what would this look like for just a normal person? This would look like you want to host a monthly strategy session or a team meeting or something like that for your business and you want to rent out your home or your dining room or some space in your home for that, and under the Augusta rule, you can rent your home out for those events for up to 14 days. So let's just say one of those days you're going to charge $1,000 for your company to use this space at your house for the meeting, which is a fair market rate to use in event space. Then you could possibly take 14,000, so 1,000 for each day up to 14 days in expenses that you take from your business, but you don't have to pay income taxes on personally.

Speaker 2:

Exactly, and she used the example of 14 days, but I love to tell people that having a once monthly meeting is a great option because that's only 12 days. It keeps you under that 14 day limit and it's also very reasonable that you would have a monthly strategy session with your team leaders or that you would have a monthly seminar for potential clients or anything like that Board meetings, planning days.

Speaker 1:

if you need content for your business team retreats, yeah, once a month. I can totally think of so many things that most business owners could do in that space with their team or a part of team from their business Exactly. So now that they understand how it works and why you would want to do it, I guess let's get into a little bit of the fine details.

Speaker 2:

Okay, perfect. So the first thing you want to do is determine the fair market rent. There's a few ways. You the fine details. Okay, perfect. So the first thing you want to do is determine the fair market rent. There's a few ways you can do this. You want to look at local event centers where you could rent a place, or hotels where they have conference rooms, things like that, and figure out what they're charging per hour, per day, whatever it is, and compare that and compare the score footage of those areas to what you're providing to the business, to your own business, and that's a good starting point.

Speaker 1:

Now, like we said, $1,000 is kind of a rule of thumb for us and we're in Texas and that definitely is a reasonably priced rate to rent something out a space for an hour or two locally. So I feel like that's a really good rule of thumb, but the IRS does want you to make sure that you're using a rate that's reasonable in your market.

Speaker 2:

Right now. If you live in New York City or in Silicon Valley or something, then it's probably a bigger number. You can't hardly rent a bathroom for $1,000 there.

Speaker 1:

So once you determine the fair market rent, you want to create a rental agreement. Now, just keep in mind that this rental agreement does not have to be submitted to the IRS and they can ask for it. So that's why you want to go ahead and have this in place, in case they were to ask for it during an audit or something. But it is not something that you need to give your CPA. It's not something that you need to submit with your tax return. So this is just something that you have on hand so that you're all good to go and you're doing everything by the book.

Speaker 2:

Exactly.

Speaker 1:

You have it in your files from day one of using this strategy and you keep it updated. And it can be super simple and short. It just needs to be the dates of rental use so you could say every single month on the first we did this. These are the dates, the purpose of each meeting, how much you're charging and signatures between both parties. But, moving forward, you need to make sure that you actually send an invoice from yourself to your business and get that paid. Okay, so if you are paying the invoice, that's where this question comes in how do you pay it? Like, do you have to pay it a certain way? Does it have to be a check? Like what are the details on getting the invoice paid and getting the money from your business to your personal account?

Speaker 2:

No, you don't have to pay it like a caveman just because you're paying from your own business to yourself. You can transfer it from your business account to your personal account via direct transfer or a Venmo or a Zelle, or write yourself a check. If that's what you want to do, it doesn't really matter. I wouldn't recommend cash because you know that makes it a lot harder to track and we want to make sure we have a good record of everything. Um, but yeah, you know, create the invoice and give it to your business and then have the business pay it the way that you normally pay bills.

Speaker 2:

Now I will say this people are often like oh, that's easy, I already have accounting software, I'll create the invoice in there. Not so fast. You can't create it in your business accounting software because it's not an invoice from your business to your personal, it's an invoice from your personal to your business, and so you're probably going to need to have I don't know chat, gpt, create one, or just find a template for one online or create one in a Word document. It really doesn't matter. Just you know, make sure it looks good and that it's legitimate and that it outlines all the terms, the dates, the amount and everything like that, just to make sure it's above board and keep that on file and you're good to go.

Speaker 1:

So you're going to pay yourself up to 14 times during the year, like Kirsten said, sometimes he recommends just doing it once per month. It's easy to remember that way. And then you're going to make sure that you have a rental agreement on hand and you are actually going to invoice the company and pay it out of the business to your personal account and then categorize that just like you would any other business expense, and it will be a rental expense.

Speaker 2:

And step two don't pay tax on it for your personal side.

Speaker 1:

Right. You will not pay taxes on the money that comes to you, however much it ends up being. You do not pay taxes on that, which is the whole reason that we're doing this right.

Speaker 2:

Right, and this might be a little bit different than what you're used to. If, say, you own a commercial building that you rent to your business, a lot of people have that arrangement. Now, that's a great way to set things up and there's some tax advantages there, but that is not the same thing. That is something you are paying rent to yourself but you're reporting that rental income because you're using it a lot more than 14 days out of the year. Okay, this is different, so don't pay tax on this Augusta rent.

Speaker 1:

And if you're working with a CPA, of course you can reach out to them and ask them any further questions that you have. But if you're giving them your stuff for taxes, it's pretty simple. I mean, you're just categorizing that as rental expense in the year, It'll just be on your tax return as a rent expense and you're doing nothing with the actual income that you made so pretty simple, right?

Speaker 1:

And then a bonus tip. If you want to go like above and beyond and you have your rental agreement, you're doing it. You're documenting everything. You can put all of these on your calendar too, just in case you were to be audited. You have all the things that you need, but it's not very likely that that would happen.

Speaker 2:

But it doesn't hurt to have it on hand just in case, and maybe even take pictures of the events that you have If it's a company party that you have for Christmas or whether it's team. Keep notes from the team meetings that you have there and you know, and you should be doing that anyway, just to make sure you're not wasting your time at your meetings, but you. But it also helps with documenting that you're legitimately using your home.

Speaker 1:

And we have a lot of content creators that we work with and it can absolutely just be a content creation day that you're sitting and planning. So when you get together to do those, you could definitely take some photos of that and just have documentation on hand.

Speaker 2:

True.

Speaker 1:

So a little recap of this. This is called the Augusta Rule, and you can rent your home to your business for up to 14 days per year. Your business deducts it as a legitimate business expense. You don't pay personal taxes on that income either, and you should do all the steps to create a rental agreement and make sure it's a fair market, rent and document everything. But you absolutely should be using this strategy and it's 100% legal. Everybody should be using this.

Speaker 2:

Well, that concludes our very exciting episode on the Augusta Rule. So until next time. Thank you so much for listening to.

Speaker 1:

What your CPA Wants you to Know. Podcast Bye.