Augusta Rule Gone Wrong!
How two doctors got themselves slapped with tax fines and penalties
“Be a man and do the right thing.” – Russell Peters
Drs. Sinopoli, Siragusa, and Mr. Hurring missed the memo. The Tax Court found they did not do the right thing. They abused the privilege of the Augusta Rule and got a well-deserved slap on the wrist.
The Augusta Rule (IRC §280A(g)) is a hot topic among physicians, especially those with medical businesses.
· It allows homeowners to rent their homes to their businesses—for things like business meetings—and receive tax-free rental income, while the business takes a deduction for the rent paid. Pretty sweet, right? It’s one of many tax perks available to homeowners.
BUT, there’s a catch:
• The rent paid must be reasonable.
• There must be a clear business purpose for the expense.
Drs. Sinopoli and Siragusa, the shareholders of their S corporation, screwed this up big time.
Here’s what went down:
• They charged their business $3,000 to $4,000 per meeting (yes, per meeting!) for “renting” their homes. LOCO!
• Over three years, they claimed over $290k in rent deductions. WUT!
When asked to justify the need for these lavish monthly meetings at their homes, their testimony couldn’t convince the court.
The result?
• The Tax Court disallowed most of their claimed deductions.
• They were slapped with thousands of dollars in penalties and interest.
Tax Lessons of the Day
“Be a man and do the right thing” when it comes to utilizing the Augusta Rule:
1. Use a fair estimation of the value of rent (consider referencing Airbnb or Vrbo rates) and follow proper accounting procedures for payment.
2. Create and retain documentation to justify the frequency and necessity of those business meetings, including a written agreement between the corporation and the homeowner.
Play it smart, and stay out of the IRS’s scrutiny!
Disclaimer
One of my heroes, Mel Herbert, MD, founder of EM-RAP, may have once said:
“Don’t just do something, stand there.”
That would be my advice to you after reading my blog—stand there (for now) and don’t do anything (yet).
Why?
While I am a tax professional, I am not your tax professional. I do not know your particular situation, and tax matters can be complex. What works for one person may not work for another.
Before taking action, assess your situation and consult with your tax professional to ensure any strategy aligns with your specific circumstances.