Too Turnt Up to do Your Taxes?

Too Turnt Up to do Your Taxes?

 

Too turnt up to do your taxes, Drake?  Really?  We are not buying it.  In fact, we believe you have actually employed a very savvy tax planning strategy.  Okay.  You see, your last two music videos were shot at home.  Maybe it was social distancing?  Or, maybe it was a tax play?  Perhaps, you are familiar with IRC 280A(g)(2) also known as the “Augusta Rule.”  Maybe we’re not as rich and famous as Drake or other artists, but we, too, can take advantage of the Augusta Rule with our small businesses.

Background

Thanks to the Augusta Rule, taxpayers can rent their residence tax free for 14 days or less.  Services like Airbnb and VBRO made it easier for taxpayers to rent their home and receive some tax-free income.  I know what you are thinking.  “That’s great, but I am not going to rent my home to some stranger.”  I hear you, but you don’t have to rent to complete strangers to benefit from this tax provision.  In fact, small business owners can benefit from this provision on two sides.

Many small business owners in the Rio Grande Valley have beach houses.  This discussion assumes beach houses meet the standard to qualify as a “dwelling unit used as a home.” They could potentially rent their beach houses to their business for employee retreats or board meetings.  Assume a business owner does not own a home on South Padre Island, but he or she still wants to have an employee retreat.  As long as the expense is ordinary and necessary, the expense could be a write-off.  Imagine that instead of renting hotel rooms for your employees, you rent your beach house for the employee retreat.  As long as you do not overpay on rent, the rent would be a deduction to the business and tax-free income to the homeowner (you, the business owner).

An important point of clarification should be discussed regarding employee retreats.  Business related employee treats are deductible by the business.  The business will need to show proof of the business need other than their statement that it’s for a business need such as an agenda showing that the majority of the events are business related.  Retreats for entertainment purposes can still be deductible, and you’ll want to make sure it does not discriminate and is open to all employees to ensure deductibility.

The employee retreat is just one example.  A small business that typically holds board meetings offsite and pays a rental fee could potentially hold their board meeting at the shareholder or member’s personal residence.  Now, there are some important caveats, however.  As previously mentioned, you cannot overpay on rent.  For example, if you typically spend $1,000 a day to rent a conference room, you will not want to charge more than that for the rental of your personal residence.  You may even want to consider getting several quotes from different places and keeping them on file for proof of reasonable rental rates.  You’ll also want to document the meeting with agendas, attendance sign in sheets, and minutes.

Another part of the provision is that taxpayers cannot deduct expenses associated with the tax-free rental of their residence.  Notwithstanding, tax-free income may be worth more than the expense deduction.

Okay.  Full confession.  I’m not sure if this strategy actually works for Drake because I am unsure of his citizenship and location of his residences, but it can work for you.  Now that you are aware of the Augusta Rule, what do you think?  Do you think Drake rented his home for the production of his music video?  If so, that is potentially a huge tax-free benefit.  We are on to you, Drake.  You are definitely not too turnt up to do your taxes.

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