As the Masters Tournament approaches, it presents an opportune time to revisit the Augusta Rule (IRC §280A), a tax provision that can provide substantial benefits to business owners. Legend has it that residents of Augusta, Georgia, who rented their homes for the Masters Golf Tournament lobbied for this exemption as rental prices rose. The Augusta rule allows property owners to rent their property for up to 14 days per year tax-free, offering significant tax savings in the right circumstances.
How to Leverage the Augusta Rule for Tax-Free Income
The Augusta Rule allows business owners to rent their personal residence to their business for legitimate meetings, with the rental income being tax-free, up to 14 days per year. This arrangement permits the business to deduct the rental expense, while the owner can benefit from a tax-free transfer of funds. Ensure that the rental meets IRS guidelines by consulting your accountant to verify eligibility.
Here are the steps you need to fully utilize the Augusta rule as a business owner:
- Schedule legitimate business meetings at your personal property – Total rental days cannot exceed 14.
- Maintain comprehensive records – Including meeting minutes and attendance lists, to substantiate the legitimacy of the rental.
- Bill the business – Rates must be reasonable and legitimate. Do some research to determine what is a reasonable rate to rent the property and document your research. Once you have rates determined, send a bill or invoice from yourself to the business with all related charges.
- Pay and record the expense – Pay the expense with a clear paper trail from the business to yourself. For example, cut a check, record the invoice as paid, and maintain the record as you would any other transaction.
ROBS Transactions: Using Retirement Funds to Finance Your Business
While the Augusta Rule facilitates a tax-free transfer of funds from the business to the owner, a ROBS transaction allows business owners to access capital from their retirement savings to fund their business. Both strategies can be instrumental in minimizing tax liability and facilitating business growth. ROBS transactions or Rollovers as Business Start-Ups utilize the Employee Retirement Income Securities Act (ERISA) and specific sections of the Internal Revenue Code to allow business owners to invest funds from their individual 401(k) plans to fund their business.
A ROBS transaction involves the establishment of a C-Corporation and the creation of a qualified retirement plan within the corporation. The business owner then rolls over funds from their existing 401(k) or other qualified retirement plan into the new corporate plan. These funds are subsequently used to purchase stock in the C-Corporation, providing the business with capital for operations or growth. Finally, the new plan would then buy stock from the C-Corporation and funds are then available to use for legitimate business purposes.
When to Consider a ROBS Transaction for Your Business
ROBS transactions are not suitable for all business owners and require careful planning and compliance with IRS regulations. However, for those who meet the criteria, they can be an effective means of financing a business.
For tailored guidance on whether a ROBS transaction or the Augusta Rule is right for your business, contact a qualified tax advisor to discuss your options.
By Rob Gould-Wetmore, Matthew Thebarge, and Cheryl McGuire
