How To Earn Your Tax Planning Green Jacket

The snow is gone in Michigan and we are watching Tiger Woods make an unexpected return to golf at the 2022 Masters in Augusta, Georgia. For many Michigan residents, the Masters marks the start of spring and a turn towards warmer weather. For many Michigan accountants, the Masters marks the winding down of our busy season and an important tax planning opportunity.

In the 1970s, residents of Augusta Georgia lobbied to exempt income received for the rental of their personal residence during the Masters golf tournament. The law passed and became known as the Minimal Rental Use Rule.

The Minimal Rental Use Rule, also known as the “Augusta Rule,” is not limited to Georgia renters. If you qualify, this rule allows anyone to rent their home or cottage tax-free for fewer than 15 days each year.

Business owners can reap twice the benefit from this tax law in situations where their corporation is the one paying the rent. In this scenario, the corporation gets a deduction for the fair market rent paid to you, and you get to exclude on your personal tax return the rent received from the corporation.

It’s a win-win. A tax deduction combined with an exclusion from taxable income is a rarity under the Internal Revenue Code.

To take advantage of this planning opportunity, you could have your corporation host your annual staff picnic or holiday party at your personal residence or cottage. Your corporation would pay you fair rent for the use of your home. The rent paid would create a tax deduction for your corporation. The rent received would be excluded from your personal income.

Given the unique nature of this planning opportunity combined with a propensity for abuse, it is extremely important that all rules be followed. This includes documentation that shows a valid business purpose for the rent paid.

Here are some of the steps that must be followed to make sure the above transaction would survive IRS scrutiny:

• Keep corporate minutes and make obvious the business purpose for the event.
• Entertainment for customers does NOT qualify. A staff picnic or staff holiday party qualifies when 100% of staff are invited to the event.
• Make sure the rent paid is fair. You can substantiate the fair rent by getting quotes for comparable space on VRBO, hotels.com, etc.
• Issue yourself a 1099 for the rent paid by the corporation if more than $600
• Provide your corporation with an invoice for the use of your home.
• Speak with your tax advisor for additional compliance obligations.

If you have interest in hosting your annual staff meeting or similar staff event at your residence, please give us a call so we can help you navigate the IRS rules and implement a process specific to your business that is in compliance with current tax laws. For those that qualify, this tax planning opportunity could save you taxes.