Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462
- The Augusta Rule: How to Receive Tax-Free Income
- Accounting Tasks at Year-End
- Happenings at SMCPA
- Tax Calendar
The Augusta Rule: How to Receive Tax-Free Income
What is the Augusta Rule?
The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return.
Originally created to protect residents of Augusta, Georgia who would rent out their homes to attendees of the annual Masters golf tournament, the Augusta Rule applies to any taxpayer who owns a home in the United States, provided that your home is not your primary place of business.
How Does it Work for the Homeowner?
So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return. The rent you charge must be reasonable and in-line with what the rental market supports; charging $1000 per night when comparable houses rent for $200 per night is not considered reasonable!
Homeowners can rent their house to individuals looking for vacation opportunities or they can rent their house to a business owner who intends to use it for business purposes.
Shifting Income from Your Business
If you are a business owner and do not use your home as your primary place of business, employing the Augusta Rule can be an effective strategy for moving income away from your business and shifting it to personal income, where there would be no tax consequence.
For example, as a business owner, you host a monthly meeting with your Board of Directors. Under the Augusta Rule, your business can pay you a reasonable amount to rent your house to conduct the once-per-month meetings. Provided that the total rental period doesn’t exceed 14 days and the rent charged is reasonable, your business is able to deduct the rent payment on the business tax return and you won’t have to report this as income on your personal taxes!
Having documentation to support your claiming this as a business deduction is critical—to prove the rent was reasonable, you could print rental quotes for similar meeting locations. To document that a meeting occurred, you could keep minutes or other records of business discussions.
Accounting Tasks at Year-End
You might wonder why there are so many extra tasks at year-end. While the government requires much of the work, there is clean-up work and adjustments that need to be done to make the books accurate. It’s not always cost-effective to perform all of these updates monthly, so you’re actually saving money by doing some of them at year-end.
Here are just some of the items that are performed at year-end.
- If you have payroll, employees need to be sent their W-2s, and the federal and state government need a copy of the W-2s with a W-3 transmittal.
- For employees, you must also have an up-to-date W-4 signed by them.
- For employers, your federal unemployment 940 return is due.
- If you have contractors, they need to be sent their 1099s, and the IRS needs the 1099s and the 1096 transmittal.
- For contractors, you must also have an up-to-date W-9 form from them. You may also need to request an insurance certificate, or you may get a surprise at your workers compensation audit.
- For vendors that claim exemption from sales tax, you’ll need to be sure you have an exemption certificate in your files from them.
- If you pay sales tax annually, your return and payment are due.
- Your personal federal, state, and local income tax and returns are due in the spring, and they can be extended until later in the year.
- Depending on the type of entity your business is organized as, you may have franchise, federal and state tax returns to file. This deadline comes up sooner than the individual tax return due date.
- Just about every asset on your balance sheet needs to be verified in some way or other:
- Petty cash accounts need to be reconciled and reimbursed as of year-end
- Bank accounts need to be reconciled with the bank statements. This includes PayPal.
- Accounts receivable balances and all other receivables need to be tied to each customer and any amounts determined to be uncollectible need to be written off.
- A physical inventory count needs to be taken and the inventory account should be adjusted accordingly.
- Fixed assets need to be reconciled to their fixed assets ledger and depreciation should be properly recorded.
- Goodwill accounts need to be checked and amortization adjusted.
- Accruals, deposits, deferred accounts and all other asset accounts need to be adjusted if necessary.
- Liabilities and equity need to be adjusted too:
- Accounts payable balances and all other payables need to be tied to each vendor.
- Liabilities that haven’t been recorded need to be added to the books.
- Loans need to tie to lender statements, and interest paid on loans needs to be properly expensed.
- The Equity accounts need to be checked and tied out to prior year balances.
- Corrections and adjustments need to be made:
- Any misclassifications and corrections need to be made on the books with adjusting journal entries or other classification tools.
- If the client is a cash-basis taxpayer, a reversing journal entry needs to be made to get the correct tax numbers.
- A clean set of reports can now be run and used.
Happenings at SMCPA:
Louis says, “Taxes are no clowning matter!”
Individuals. If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.
All businesses. Give annual information statements to recipients of certain payments you made during 2019. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments. • All payments reported on Form 1099-B. • All payments reported on Form 1099-S. • Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 14 of Form 1099-MISC.
All businesses. File information returns (for example, certain Forms 1099) for certain payments you made during 2019. These payments are described under January 31, earlier. However, Form 1099-MISC reporting nonemployee compensation must be filed by January 31. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, which form to use, and extensions of time to file. If you file Forms 1097, 1098, 1099 (except a Form 1099-MISC reporting nonemployee compensation), 3921, 3922, or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms generally remains January 31.
Farmers and fishermen. File your 2019 income tax return (Form 1040 or Form 1040-SR) and pay any tax due. However, you have until April 15 to file if you paid your 2019 estimated tax by January 15, 2020.
Employees who work for tips. If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.
Partnerships. File a 2019 calendar year return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or substitute Schedule K-1 (Form 1065). To request an automatic 6-month extension of time to file the return, file Form 7004. Then file the return and provide each partner with a copy of their final or amended (if required) Schedule K-1 (Form 1065) by September 15. S corporations. File a 2019 calendar year income tax return (Form 1120-S) and pay any tax due. Provide each shareholder with a copy of their Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc., or substitute Schedule K-1 (Form 1120-S). To request an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe in tax. Then file the return; pay any tax, interest, and penalties due; and provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) by September 15. S corporation election. File Form 2553 to elect to be treated as an S corporation beginning with calendar year 2020. If Form 2553 is filed late, S corporation treatment will begin with calendar year 2021.
Electronic filing of Forms 1097, 1098, 1099, 3921, 3922, and W-2G. File Forms 1097, 1098, 1099 (except a Form 1099-MISC reporting nonemployee compensation), 3921, 3922, and W-2G with the IRS. This due date applies only if you file electronically. Otherwise, see February 28, earlier. The due date for giving the recipient these forms generally remains January 31. For information about filing Forms 1097, 1098, 1099, 3921, 3922, and W-2G electronically, see Pub. 1220.