It could mean 14 days of tax-free income annually.
Have you ever considered the fortunate individuals who are able to have a film team utilize their home for a commercial or production shoot? Should you be so lucky, you will experience significant disruptions for a couple of days or a week or so. Cast and crew members barging in and out of your home, causing a little—or a lot—of mess. At least you’ll have access to craft services, which always include really good food.
Here is The Best Part
Once the cast and crew have all left and the unpleasant damages have all been fixed, you find yourself with a sizable sum of money that you received to “rent” out your property. You grab (carpe diem style) the chance to declare, “That’s my house,” to anyone watching the tv with you. Or for the bragging rights you get when you and all your friends go to the movie. Here is the most amazing part, that big check from the production accountant is probably not taxable as income, which is the nicest part of the experience.
“What?” You Say. “Not Taxable, That’s Not Possible!”
You may not be familiar with the “Augusta Rule.” The reason this little known gem of an exclusion got its name is that many people believe it was made either on behalf of or at the request of the people who reside near the Augusta Golf Course. And according to a Forbes article, yes.
A Bit of Internal Revenue Code—Only for Medicinal Purposes
Section 280A and the Augusta Rule. Congress enacted §280A in the Tax Reform Act of 1976, P.L. 94-455, 90 Stat. 1520, 1569, to address situations where personal use of a residence is mixed with business use. Section 280A does not apply, however, if the business activity is de minimis (that means not very much in Latin). Section 280A(g) draws a bright-line de minimis rule at 14 days. That is, if you rent your property out for 14 days or less during the year, §280A(g) says you may not take any deductions. But §280A(g) also says you also do not have to report the income. Thus, income from the rental of your house is not taxable, as long as it is for 14 days or less per year. Beyond 14 days in a year, you need to declare the income as usual. Make sure to consult your tax preparer and bring up the ‘ol Augusta Rule.
Can I Rent My Boat to My Corporation, Tax Free?
For those of you who own your own business and must pay a monthly rental fee, you know that fee is deductible as an “Ordinary and Necessary Business Expense” (§162). So, how do you rent your house, boat, car, or ADU and not drive your CPA “Cuckoo for Cocoa Puffs?”
It’s not nearly as easy as writing out a corporate check to yourself, subtracting the amount at the business level, and keeping your personal income out of mind. Initially, for the meetings to qualify as regular and essential, they must have valid objectives. Second, the rental fee ought to be reasonable, even in cases where the meetings have a valid reason. Proof is only important if you find yourself in front of an IRS auditor, as I advise every one of my clients on any item that is deductible. There can be severe and expensive consequences for breaking the regulations. How then do you support the deduction? Actually, it depends on the IRS Revenue Agent, their background, and what they had for breakfast that day.
Substantiation
You must have a written plan. A plan expresses your intentions. Independent [comparable] within a 100-mile radius need to bolster it. Every three years, a professional appraiser should be included in the plan to value the rental rate. “To determine whether the payments in question are deductible under Section 162, the basic question is whether the payments were in fact rent and not something else disguised as rent.
*** Only the portion of an expense that is reasonable qualifies for deduction under Section 162(a),” Judge Vasquez wrote in an actual Tax Court Case. In addition to having a strategy, you may wish to get it reviewed by a professional, if only to shield other portions of your return from the auditor.
A Last Word
In the event you receive a 1099-MISC for renting your home for filming, please do not ignore it. Add the amount to your tax return and make an adjustment referencing the Augusta Rule. This is a great loophole (or government subsidy, as I have addressed in a previous article) if used properly. Just keep in mind that this loophole can be very tricky and wrought with tax-related legal landmines.
