How Does the Augusta Rule Work for Business Owners?

Under IRC Section 280A(g), a homeowner can rent their personal residence to their business for up to 14 days per year and exclude every dollar of that rental income from their federal tax return. At the same time, the business deducts the rent as an ordinary and necessary expense. For S-Corp owners, that combination can produce meaningful, repeatable annual savings.

What Is the Legal Basis for the Augusta Rule?

The provision is codified in IRC Section 280A(g). The section generally restricts deductions for homes used for personal purposes, but subsection (g) carves out a specific exception: if a dwelling is rented for fewer than 15 days during the tax year, the rental income is fully excluded from gross income. It does not appear on Schedule E, does not affect adjusted gross income, and does not factor into passive activity calculations.

The nickname traces back to Augusta, Georgia, where homeowners near Augusta National Golf Club rented their homes during The Masters tournament and discovered they owed no federal income tax on the proceeds. The provision had existed in the code for years. Business owners nationwide have since adopted the same approach.

The 14-day ceiling is absolute. On day 15, the exclusion disappears entirely, all rental income becomes taxable, and the standard rental property rules under Schedule E apply retroactively to every day of rental in that year. One extra day does not just make the 15th day taxable. It collapses the entire exclusion.

For broader context on how the IRS treats residential rental income, see IRS Publication 527: Residential Rental Property.

Why Does This Strategy Matter for S-Corp Owners?

The augusta rule irs provision creates an asymmetry that normally does not exist in tax law. When a payment is excluded from the recipient's income, the IRS often denies the payer's deduction. Section 280A(g) is a deliberate legislative exception where that symmetry breaks down in the taxpayer's favor. The S-Corp's deduction stands on its own under Section 162 as an ordinary and necessary business expense, provided the rental serves a genuine business purpose and the rate is reasonable.

This matters most for S-Corp owners because the deduction reduces the corporation's net income, which reduces the pass-through income reported on the shareholder's Schedule K-1, which reduces what flows to the personal return. The homeowner receives the rental payment tax-free. The corporation reduces its taxable income. Both outcomes are legal and repeatable when the conditions are met.

The strategy applies to primary residences and qualifying second homes. It is not limited to vacation properties. What qualifies is the structure of the transaction, not the type of home.

California treatment should be confirmed with your tax advisor.

What Does Proper Implementation Look Like?

Compliant implementation requires five elements working together.

A written rental agreement executed before the first rental day. The agreement should name the parties, describe the property, specify the rental rate, list the permitted business use, and define the maximum number of rental days. A retroactively created agreement is a significant red flag in an IRS examination.

A reasonable, market-supported daily rate. The rate your S-Corp pays must reflect what comparable venues in your area would charge for similar space and amenities. Obtain at least three written quotes from local conference centers, hotel meeting rooms, or event venue platforms before setting your rate. The IRS can recharacterize above-market rent as a constructive dividend, which is not deductible by the corporation and is taxable to the shareholder. Price at market, document your comparables, and revisit the rate each year.

A corporate board resolution. Even in a single-shareholder S-Corp, the board should formally authorize the rental arrangement, reference the business purpose, and approve the rate. This resolution belongs in the corporate minute book.

Substantive, documented business activity. Board meetings, annual strategic planning sessions, quarterly business reviews, shareholder meetings, and advisory board sessions all qualify. A written agenda prepared in advance, a list of attendees, notes summarizing decisions, and follow-up action items are required for each rental day. Generic or boilerplate minutes repeated from quarter to quarter have been cited in U.S. Tax Court opinions as grounds for disallowing home-based meeting deductions.

Actual funds transfer. The S-Corp must wire or transfer payment from its business bank account to your personal account. Paper-only transactions are a significant audit red flag. Retain the transfer confirmation for every payment.

For guidance on what the IRS considers ordinary and necessary business expenses, see IRS Publication 535: Business Expenses.

What Are the Most Common Mistakes?

Most errors fall into a small number of categories.

• Crossing the 14-day limit. Count every rental day conservatively, including setup and teardown days. Track the count actively throughout the year. Stopping at 14 is non-negotiable.
• Setting a rate without documentation. A round number chosen for convenience, with no market research behind it, invites recharacterization. The specificity of your rate communicates that it was market-derived.
• No written agreement. A verbal understanding between you and your own corporation does not satisfy the IRS standard for an arm's-length transaction.
• Payments from the wrong account. The payment must originate from the S-Corp's business account, not a personal account.
• Applying the strategy to a sole proprietorship or disregarded entity. The augusta rule irs framework requires a transaction between two legally distinct entities. A sole proprietor paying themselves is moving money from one pocket to another, and the IRS does not recognize that as a deductible rental expense. Single-member LLCs taxed as disregarded entities do not qualify for the same reason.
• Including personal or social events. A dinner attended by business colleagues does not become a board meeting because business was discussed. The rental must serve a genuine, primary business purpose.

How Does This Fit Into a Broader Tax Strategy?

The augusta rule irs approach works best as one component of an integrated annual plan rather than a standalone move. A few coordination points are worth understanding.

Home office deduction interaction. The Augusta Rule and a home office deduction can coexist, but the same square footage should not be claimed under both provisions for the same periods. A tax advisor should analyze which approach produces more value before both are claimed on the same return.

S-Corp reasonable compensation. The rental payment to the shareholder-homeowner is separate from W-2 compensation and does not affect the reasonable compensation analysis. The two planning layers complement each other. For more on how compensation decisions interact with S-Corp structure, see our post on what reasonable compensation means for an S-Corp owner.

Year-end timing. Because the S-Corp's deduction reduces pass-through income in the year the payment is made, timing rental payments before December 31 can affect the shareholder's year-end tax position. Owners projecting high pass-through income in a given year may benefit from maximizing rental days to the 14-day ceiling and completing all payments before year-end. Our post on S-Corp year-end planning covers related timing decisions.

Annual renewal. There is no multi-year cap and no income-based phase-out. An owner who implements the strategy correctly in one year can repeat the same structure in subsequent years, refreshing the fair market value analysis and corporate resolution each January.

For additional context on how the IRS evaluates this strategy, Kiplinger's analysis of Augusta Rule planning explains the core mechanics alongside the compliance considerations that distinguish defensible transactions from those likely to attract scrutiny.

What Should You Do Before the Year Ends?

The augusta rule irs strategy must be implemented prospectively. A rental agreement signed after the fact, minutes produced in December to cover meetings held in January, or a rate set retroactively to optimize the tax outcome will not survive IRS examination. The strategy works because it is genuine. Execute it genuinely.

If you have not yet set up the rental agreement and corporate resolution for the current year, our team can help you evaluate whether the structure fits your situation and what documentation you need in place before your first rental day.