Can an LLC Use the Augusta Rule for Tax Deductions?

The Augusta Rule, formally known as Internal Revenue Code Section 280A, offers a specific tax provision related to rental income from a personal residence. This rule permits homeowners to rent out their primary dwelling for a limited number of days each year without needing to report the income received. This provides a tax benefit for individuals who occasionally rent their homes, allowing them to exclude this rental revenue from their taxable income.

Understanding the Augusta Rule

The Augusta Rule centers on a “14-day rule.” If a taxpayer rents out their personal residence for 14 days or fewer during a tax year, the rental income generated is not considered taxable and does not need to be reported.

A “personal residence” for this rule encompasses a dwelling unit, such as a house, apartment, condominium, mobile home, or even a boat, provided the taxpayer uses it for personal purposes. Because the rental income is excluded from taxation, no rental expenses, such as depreciation or utilities, can be deducted against this income for the days the rule applies. However, homeowners can still deduct general itemized deductions like mortgage interest and property taxes on Schedule A.

How a Business Utilizes the Augusta Rule

For a business to utilize the Augusta Rule, the business acts as the tenant, renting the owner’s personal residence. The individual owner functions as the landlord in this arrangement, with the business paying rent for the property’s use.

The rental must serve a legitimate business purpose, such as holding board meetings, client presentations, training sessions, or company retreats. The use must be genuinely for business activities and not for the owner’s personal enjoyment. The rent paid by the business to the owner must align with fair market value (FMV), meaning the rental rate should be comparable to what an unrelated third party would pay for similar space in the same location.

The business can then deduct this rent payment as a legitimate business expense, which can reduce its taxable income. The individual owner receives this rent, which remains excluded from their taxable income under the Augusta Rule, provided all conditions, including the 14-day limit, are met.

Applying the Augusta Rule to an LLC

An LLC can utilize the Augusta Rule, provided it satisfies all applicable conditions. Regardless of how the LLC is taxed, the LLC is treated as a distinct entity for this rental transaction. The rental arrangement is specifically between the LLC (as the tenant) and the individual owner (as the landlord).

An LLC must observe several conditions:
The LLC’s rental of the property must not exceed 14 days within the calendar year. Exceeding this limit would require reporting the rental income, making it taxable.
The rented property must qualify as the owner’s personal residence for tax purposes, meaning it is not solely an investment or business property.
The rent charged must be at fair market value (FMV). Determining FMV often involves researching comparable local event space rentals or short-term property rentals. This helps prevent an inflated rental rate, which could attract IRS scrutiny.
The LLC must demonstrate a legitimate business purpose for renting the space. Examples include annual strategic planning sessions, client meetings, or employee training events.
During the rental period, the portion of the home used by the LLC must be exclusively for business activities. Personal use of that specific space is not permitted during the rental days.
A formal, written rental agreement between the LLC and the owner is advisable. This agreement formalizes the transaction, establishes an arm’s-length relationship, and provides clear documentation of the terms, including rental price and duration.

For the LLC, the rent paid is a deductible business expense, reducing its taxable income. For the individual owner, the rental income received is excluded from their taxable income, offering a distinct tax advantage.

Documentation and Record Keeping for Compliance

Maintaining comprehensive documentation is essential for both the LLC and the individual owner to substantiate the use of the Augusta Rule.
A formal, written rental agreement between the LLC and the owner should be in place, outlining the terms, duration, and purpose of the rental. This agreement serves as primary evidence of the legitimate business transaction.
Proof of payment from the LLC to the owner is crucial, including bank statements, canceled checks, or other financial records.
To support the fair market value of the rent, documentation such as quotes from local venues for similar event spaces, market research on comparable short-term rentals, or real estate appraisals should be kept.
Records demonstrating the legitimate business purpose are necessary, including meeting agendas, attendee lists, meeting minutes, or descriptions of business activities conducted during the rental period.
A clear calendar or log of the specific dates the property was rented by the LLC is important to prove adherence to the 14-day limit.
While direct rental expenses are not deductible by the owner under this rule, any business expenses incurred by the LLC for the event, such as catering or supplies, should be documented with receipts. This record-keeping ensures compliance with tax regulations.