A few months back, I was giving a small training for small businesses in LAEDA’s office in Camden, New Jersey. While going over my presentation, I try to make it interactive and allow participants to ask questions on the topic being discussed or similar ones (at the end, there is always a Q&A portion for any tax or accounting questions).
One of the participants asked if it was true that he could rent his vacation house or similar to the business for less than 14 days and deduct those expenses at the business like meetings or similar, what it is commonly known as Augusta rule. He mentioned that he would rent it for meetings and get her family there every month. He was ready to implement his bulletproof strategy based on Tiktok preaching. I mentioned that it was “bullshit” as the proper use was extremely complicated to document and that they were numerous and more beneficial deductions or strategies to be used by micro and small businesses (penny wise, dollar fool).
First, I went over the rental real estate activities (you can find flowcharts and diagrams online)
- Option 1 – less than 15 days – non taxable activity (not reported income and not reported related expenses)
- Option 2 – more than 15 days and used by owner (or family members), then it would depend on how much
- Option 2a – owner use more than greater of 14 days or 10% of rental days – Activity is mixed used as the use by the owner is material by IRS standards. Then, the IRS requires to report the rental income and then, allocate the expenses based on the days property is used (note Court allows to use daily basis for real estate taxes and mortgage interest which might allow itemized deductions and might be more beneficial)
- Option 2b – owner use is not more than greater of 14 days or 10% of rental days – Activity is rental as the main purpose is rental business and owner did not enjoy much. Then, the IRS treats it like any normal rental reporting the income and the related expenses.
After that, I mentioned that in order to bring his family, the family members would be part of management or his board or similar position in the business structure. Additionally, there should be documentation on the meetings generating minutes of each meeting and ensuring that the topics were business related (talking about school grades or summer sport activities would not be considered business related).
Recently, I read an excellent article on this topic (link below) that would serve to educate the public. The article requires a little more time (probably 2 or 3 minutes) than a thirty seconds twerking video, but it is extremely more relevant educating on the Augusta rule. Do not follow influencers’ advice on taxes, investments, etc. and consult with a professional.
Link to the article from Forbes titled: Tax Court Case Shows What TikTok Isn’t Telling Taxpayers About Business Expenses
Laeda’s mission statement is “LAEDA is a not for profit economic development organization dedicated to assisting emerging entrepreneurs and small business owners to start and grow their businesses in Camden, Burlington, Gloucester, Atlantic and Cumberland counties in New Jersey.” Link to LAEDA’s website