Rent Your Home to Your S Corporation – The Augusta Rule

Reduce Your Taxes With The Augusta Rule

One often-overlooked tax benefit that could work in your favour is the Augusta Rule. If you own an S corporation, this “rent your home” provision might offer a smart opportunity to reduce your taxable business income. Here’s what you need to know about the Augusta Rule, its origins, and how to make it work for your dental practice.

What Is the Augusta Rule?

The Augusta Rule comes from Section 280A(g) of the Internal Revenue Code (IRC). It allows homeowners to rent out their personal residence for up to 14 days per year without reporting the rental income on their personal tax return.

• Homeowner Benefits: You can rent your home and receive tax-free rental income for up to 14 days.
• Business Benefits: Your business can deduct the rental payments as a legitimate expense. Note: it must be properly documented and priced at fair market value.

If you own your dental practice through an S corporation, this creates a golden opportunity. By renting your home to your practice for business-related events (e.g. board meetings, planning sessions, or client consultations) you can effectively transfer income from your business to yourself, tax-free. 

However, like all good things, there are strict rules you need to follow to make it work.

Why Is It Called the Augusta Rule?

The Augusta Rule was named after Augusta, Georgia, the home of the famous Masters Golf Tournament. During the event, many Augusta residents rent out their homes to visitors for the week, often earning thousands of dollars.

To encourage this practice, the IRS advised that homeowners could exclude this short-term rental income from their taxable income—provided it’s for 14 days or less. While originally linked to golf, this provision is now used far beyond Augusta by individuals and business owners alike.

Applying the Augusta Rule to Your Dental Practice

Luckily, the Augusta Rule isn’t just for golf fans. For dentists operating as S corporations, it can be a practical way to save on taxes while hosting legitimate business events. Here’s how you can access the benefits:

1. Host Business Events at Your Home

Plan and host events with a clear business purpose and rent your home for purposes such as:

• Staff meetings or retreats.
• Quarterly planning sessions.
• Patient appreciation events or information nights.
• Continuing education or training sessions for your team.

Each event should have a legitimate connection to your dental practice.

2. Determine the Fair Market Rental Value

The IRS requires that the rental rate is fair and well-documented. Here’s how to determine it:

• Research comparable venue rental rates in your area.
• Ask a real estate professional for a valuation.
• Use online tools or market analysis reports.

Pro Tip: Keep detailed records of how you calculated the rate. This documentation is critical in case the IRS ever questions your figures.

3. Create a Written Rental Agreement

Draft a formal rental agreement between you (the homeowner) and your S corporation. Include the following details:

• Dates and duration of the rental period.
• Purpose of the event.
• Agreed rental rate.
• Payment terms.

The agreement makes the transaction look professional and protects you in case of an IRS audit.

4. Document the Event

Maintain a paper trail to support your claim. Make sure to:

• Write an agenda for the event.
• Keep an attendee list.
• Take photos or keep receipts (e.g. for catering or training materials).

The more proof you have, the stronger your case if the IRS requests additional information. This helps to substantiate the business purpose of renting your home to your S Corporation.

5. Process Payments Correctly

To satisfy the IRS, treat the rental payment as a legitimate business expense.

• Your S corporation pays you (the homeowner) directly.
• Record the expense in the corporation’s financial books.

As long as the home is rented for 14 days or less during the year, this rental income is excluded from your personal taxes.

Key Considerations for Dentists

The Augusta Rule is a powerful tool, but it’s not without risks. Follow these guidelines to ensure compliance with IRS legislation:

1. Substance Over Form

The IRS doesn’t like transactions that seem artificial or unnecessary. Make sure your rental expenses are:

• Legitimate.
• Necessary for the business.
• Supported by strong documentation.

For example, don’t claim a personal birthday party as a “team-building retreat.”

2. Stick to the 14-Day Limit

If you rent your home for more than 14 days, the tax-free benefit is lost. The rental income would then need to be reported, and you may face additional tax obligations.

3. Consult a Tax Professional

Every situation is unique, and tax laws can be tricky. A CPA who understands dental practices and the Augusta Rule can:

• Help you structure the arrangement correctly.
• Ensure compliance with IRS guidelines.
• Maximize your tax savings.

Why the Augusta Rule Works So Well for S Corporations

S corporations are pass-through entities, meaning their profits are taxed only at the individual level. The Augusta Rule aligns perfectly with this structure because:

• Rental payments reduce the S corporation’s taxable income.
• You (the homeowner) receive the tax-free rental income.

This benefit can make a noticeable difference in your overall tax burden.

Common Mistakes to Avoid

To successfully use the Augusta Rule, avoid these pitfalls:

• Overestimating Rental Rates: Using an inflated rental value can raise red flags with the IRS.
• Poor Documentation: Without detailed records, the IRS could disallow your deduction.
• Misusing the Rule: Using the rule for personal events or non-business purposes can backfire.

Always follow the law and ensure every event is properly documented.

Save More on Taxes

The Augusta Rule is a smart and legitimate way to save on taxes, especially if you run your dental practice through an S corporation. By hosting business events at your home, you can reduce your practice’s taxable income and enjoy tax-free rental income at the same time.

But, as with any tax strategy, careful planning and documentation are key. Make sure you work with a knowledgeable CPA, keep detailed records, and ensure your events have a clear business purpose. To find out more about the Augusta Rule, book a call with our team at DrillDown Solution. We can guide you through the process and help you maximize the tax benefits for your dental practice.

Read Our Other Popular Blogs

5 Keys to Putting Kids and Family Members on the Payroll

What is RCM (Revenue Cycle Management)?

7 Ways to Improve Your Dental Practice Profits