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Section 280A Deduction Explained: How to Benefit from Tax-Free Rental Income

Self-employed individuals or small business owners can avail of the home office deduction. This deduction permits writing off a home workspace of up to 300 square feet at $5 per square foot which gives a potential deduction of $1500 annually. However, are you aware of another deduction that can offer even more benefits? This is the Section 280A deduction or the Augusta Rule that can offer better perks if used correctly. Let us understand the Section 280A deduction.

Tax-free rental income under Section 280A explained

What is the Section 280A deduction?

The section 280A deduction also known as the Augusta Rule is a smart tax saving method that permits you to legitimately convert parts of your personal expenses into deductions from your business. Specifically, under section 280A(g) of the Internal Revenue Code, a business owner is permitted to rent their home to the business for as many as 14 days annually. This rental income Is considered tax-free and can be written off from the business. This deduction is allowed to small business owners, recognizing the costs associated with conducting business meetings.

Advantages of Section 280A

As a small business owner, Section 280A(g) or the Augusta Rule offers you several benefits.

1. It helps you generate tax free income

The rental income you receive from your business is not taxable unless you rent your home to your business for more than 14 days per year. So stick to the 14 day duration, and you can enjoy tax free rental income from your business.

2. It permits your business to write off the rental expense

Section 280A(g) permits you to write off the rental expense from your business income. This means that you can reduce your business’s taxable income as well and save money on business taxes.

3. It encourages using your home as a business asset

Rather than spending on rent for another space to hold your business meetings, the Augusta Rule promotes utilizing your home space for business purposes. It helps convert your home into a business asset.

 Implementing Section 280A

Employing section 280A in your business requires planning, strategizing, and documentation. These are the steps you can follow to implement the provisions of this section.

1. Research venue rates

The first step you need to take is to find out how much you would be likely to spend on a similar local venue for your business meetings. Ensure you price your home rental space reasonably as per the market rates. These rates generally differ based on the location.

2. Plan business meetings at home

Plan to conduct genuine business meetings at your home. Ensure that the total number of meeting days per year does not exceed 14 days. Moreover, these meetings should be for business purposes only and not for entertainment. It would be preferable if these meetings were with current clients and business associates rather than with prospective clients.

3. Ensure you document the meetings with corporate minutes

Document your meetings with proper corporate minutes. Engage a secretary or personal assistant to write down the minutes of the meeting to prove the meeting was for legitimate business purposes.

4. Bill your business

Create an invoice to bill your business for the rent of your premises. Specify all the charges and ensure you charge your business as per the prevailing market rental rates.

5. Pay the rental bill

Ensure your business pays the rental bill for your premises with a business check. You can also issue a receipt once you receive the business check from your business. Always maintain a paper trail to prove the legitimacy of these transactions. Thus, this rental income for you will be treated as a business expense and deducted from your business income when calculating taxes.

6. Document everything

This rental income you obtain from your business must be reported as income in your personal income tax form. However, this income will not be taxable under the Section 280A(g).

 Section 280A provides small business owners with the undeniable benefit of reducing their taxable incomes while using their homes as rental spaces for business meetings. Proper planning and documentation will aid in successfully using the provisions of Section 280A to your advantage.

Finlotax: A dependable taxation firm in CA

We are Finlotax, an expert taxation firm based in CA offering services in bookkeeping, tax prep, tax planning, payroll, and compliance solutions. We can guide you in understanding and implementing the provisions of section 280A in your business. If your business formation differs from the usual LLC or sole proprietorship, you can discuss how to write off rental income and applicable schedules with our tax associates. Get in touch at 4088229406.