Home Office Deduction vs Corporate Rent | Incite Tax

The difference between home office deduction and a tax strategy that we call corporate rent and the rest of the world often refers to as the Augusta Rule. As a business owner with an LLC, you are able to write off the use of your home. Some methods are better than others. Now, you may have already heard about the home office use. So, To define how that's actually used, let's start with that, and then we'll get into what this corporate rent strategy could be for you. In order to be able to deduct the use of your home office, the IRS says it needs to be regular and exclusive use. So that means the portion of the home that you've designated for your business, that area needs to be used solely for business. And not for any personal purpose. And then regular is a lot easier to argue. Exclusive is the challenge with claiming this because the IRS says it has to be exclusively for business purpose. It also needs to be your personal place of business. Now this doesn't mean you have to have clients at your home, but it means that primarily when working on your business, that's the space that you use. Again, it has to be exclusive for business purpose. Assuming you hit those criteria, then what the IRS lets you do is they let you take the business use percentage of your home, and you can take that percentage as a deduction for your mortgage payments, maintenance, things like that. As an example, let's say I have a 1,000 square foot home and I have a 100 square foot business space. That's 10%. So I would get to claim 10% of my mortgage interest and property tax on my business use of home form on my personal return. I could claim 10% of my utilities. I could claim 10% of maintenance. Now, the form on the tax return is not super straightforward. You have to claim 100% of those deductions on the form, and then based on the business use percentage, it calculates how much you get of the business deduction. Here's the kicker though. The business use of home tax form is a trigger to be audited by the IRS. That's the reason they set up the form in the first place. You know why? Because their rules say it has to be for exclusive business purpose, which means they, on a technicality, could argue if you answered a personal phone call in the business space, that it is no longer exclusive for business purpose, and they can disallow the whole deduction in the first place. We don't love the business use of home tax form. The IRS has created a simplified form if you want to claim this. Instead of Labeling out what's my total utilities, repairs, maintenance, mortgage payments, things like that. They just say, we'll allow you to take $5 a square foot of your home office space up to 300 square feet. So if my home office space is larger than 300 square feet, this might hurt me. If my utility expenses and things like that are more expensive, the $5 a square foot might hurt me. The calculation would max out at $1,500 for the simplified formula. $1,500 of a deduction. That doesn't mean you save $1,500 in taxes. And emphasizing that because the business use of home as a tax strategy is so inferior to what the Augusta rule and the corporate rent rule will do for you. But I did want to point out that's how the business use of home form works. It is an audit trigger, you should be aware of that. The complication in the calculation is not great. And guess what, if you have a mortgage interest and property tax anyways, you're probably itemizing and you're taking that as a tax deduction already. You don't get to double dip on that just because you have the business use form on your tax return. And so why file a form if it's going to increase your chance of being audited? So here's the upgraded, more sophisticated, better use of your time and saving you money strategy. The world calls it the Augusta Rule. The Augusta Rule, they call it that because professional golfers have the PGA and they have a really important tournament for them called the Masters. The Masters happens to take place in Augusta, Georgia. Now in Augusta, Georgia, it's a very wealthy area and the homes During the Masters, you have a bunch of people flooding into Augusta, and sometimes there's not enough hotel capacity. So these rich landowners were like, hey, what if we rented our space, our house, to people who are coming to watch the Masters? But we don't really want to pay tax on it because it's not really a rental property. It's just my house. I still live here. Well, luckily they're connected. Luckily for us, and I'm going to share with you why. There's this really fun tax rule that exists. The rule says if I have a property and I rent it out for more than 14 days, it is now considered a rental activity and I am required to claim that rental activity on my tax return. So income, expenses, I could claim those things. If I have a property and it's rented out for less than 14 days though, it is not considered a rental activity for tax purposes, which means any income I receive off of that, I am not required to claim as rental income because it's not a rental activity. So let's say you have your business entity, which is an LLC. It doesn't matter how it's taxed as long as you have a separate business entity. It does not work if you're just a sole proprietor. The LLC is going to sign a simple lease agreement with you as a person to rent your living space from you 1 day per month. So you do the math, that's 12 times a year. So you're not having a rental activity. However, on the business side, you are going to claim a rent expense. Because based on tax rules, that rent expense is ordinary and necessary, and it qualifies as a tax deduction. So I'm going to lower my business taxable income on the profit and loss statement, which goes to my personal return. But on my personal return, I don't have to claim the rental income. So it's a way for us to take a distribution and basically turn it into an expense. We recommend that as a universal rule, $1,250 for the day use is standard. It's not super high. It's like a qualified amount. Now, if you live in an area where you feel like $1,250 for the day They use isn't high enough, you can go to websites that are for vacation rentals, find a house similar in size to what you have, similar in geographical area, and if they're renting at those spaces is more than $1,250, then go ahead and take a screenshot, save that information, because that's your proof if you're audited as to why you're charging an amount higher than the $1,250. You can also go and get quotes from hotels if you wanted to rent a convention center, but like a conference room there, and sometimes that'll give you a quote that's higher than $1,250. But those are recommendations we have if you want to go above $1,250. Higher than that, we feel like it's pretty easy to come up with documentation if you need to, if you're audited, to justify $1,250 for the one-day use. With this scenario, it's really important that you have a paper trail. That means your business account needs to transfer money to your personal account for the $1,250 for the one time a month, and it needs to be a separate transaction. It can't be a larger transaction like $5,000, and then you're just saying, oh, $1,250 of that was for the corporate rent. Paper trail's got to be the amount of the rent. Now I think we all have enough stuff in this life to remember that we need to do, so I recommend setting this transfer up as an auto transfer. $1,250 a month auto transfer from my business account to my personal account. Your accountant's going to book it as rent expense on your books. That lowers your taxable income. You now save anywhere from $3,000 to $6,000 if you're using the $1,250. Now again, I mentioned if you can go higher, go higher. We have clients that are in New York City and they found Documentation to justify $4,000 a day. That's a $48,000 deduction that they're going to claim. That's saving them anywhere from $10,000 to $20,000 in taxes. Pretty cool, right? Compare that to the $1,500 deduction that you could get with the home office using the simplified method. Like, it just— it doesn't even compare. Not to mention, the strategy is a rent expense on your books, so there's not any sort of additional IRS audit trigger that is getting sent out. Last thing to mention about This strategy, if you happen to have big events at your property, you could justify a larger price for that bigger event. So the normal meeting, the normal flow structure for the strategy is I have a board meeting and often I might be the only one present. I'm going to try to have someone else there that's on my meeting minutes that says, you know, maybe Ryan went on that board meeting or maybe my wife Kara was there. But in general, it's me, maybe a second person, and that's going to be my $1,250 scenario. But if I am having an event at my house, whether that's team members coming over or clients coming over, it's going to be 5, 10 people, maybe 20, 30, 50 depending on your home. The bigger the event, the larger you could charge for that event because now you want to think about what would I have to pay if I hosted this at a hotel? What would my cost be? Well, then that's your market rate for renting the home space. That could be $20,000 for the day use because that's what a hotel would have charged you had you had the event at their location. So keep that in mind. So I hope this was insightful. Home office versus the corporate rent strategy. We recommend corporate rent strategy. We gave you the steps you need to take. We recommend implementing this as soon as possible. 3 minutes to go and log into your bank account, create an auto transfer of the $1,250 from your business account to your personal account. Do it today. Take advantage of the strategy. And our whole desire is to help keep money in your pocket because We think the IRS sucks. We think the IRS sucks.