Article
Wondering if you actually qualify for the Augusta Rule?
This video breaks down exactly what you need to qualify and why our tax lawyer approved process is built to keep you compliant and audit-ready.
- What types of businesses qualify
- Why “real business activity” matters
- The rules around entities, partnerships, and home office deductions
- How one misstep can trigger an audit (and how we help you avoid that)
This isn’t about pushing the limits. It’s about keeping more of what you earn without crossing the line.
Start your tax-free income strategy today.
Video Transcript:
0:00
So, how do you know if you qualify for
0:02
the Augusta rule or at least our
0:05
approach to it? We’re a little more
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conservative because we want you to win.
0:08
We’ve got some guidelines we need you to
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qualify for. So, we have a small list of
0:12
qualifications. We’re only going to ask
0:14
you once on our application. It’s going
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to take you about 30 seconds to answer
0:20
yes or no to each of the boxes. We hope
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you can answer yes to all of them. The
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reason we have these guidelines is to
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make it much more likely that in the
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unfortunate event of an audit that you
0:31
win. That’s why we ask these questions.
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Won’t take you long to answer them, but
0:35
I want to explain what it is we want
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from you. The first thing is we need to
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have a business over which you have
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either control by ownership or
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managerial control. You need to be the
0:46
decision maker. Right? If we’re not
0:47
dealing with the decision maker, it’s
0:49
probably not going to be a good fit.
0:51
That’s the person we need to be dealing
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with. We need certain types of entities.
0:54
We need your business under tax law to
0:57
be a separate person from you. Not all
1:01
businesses are considered to be separate
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from you. So, we’re looking for an S
1:05
corporation or an LLC taxed as an S
1:07
corporation. We’re looking for a
1:09
Ccorporation or an LLC taxed as a
1:12
Ccorporation. We could go with a
1:14
partnership, a general partnership,
1:15
which we almost never see. We could go
1:17
with a limited partnership or a limited
1:20
liability partnership. But in all those
1:22
examples, all the examples that were not
1:25
corporate, so the S corp or CC corp, you
1:28
can own 100% of and that’ll work. But
1:30
when it comes to the partnership, first
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of all, we need to have a member who is
1:35
not your spouse. Your spouse can be a
1:37
member. It’s just we we’re a little bit
1:39
conservative in our approach. It’s not
1:41
clear if the IRS would treat an LLC or a
1:43
partnership owned by two spouses as a
1:46
separate person. And for the business to
1:48
rent to you, we need for the business to
1:51
be a separate person. So, we’re being a
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bit conservative about how we approach
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it because we want you to win. So, we
1:57
need a CC Corp or an S Corp or an LLC
2:00
taxed as either or we need a partnership
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LLC limited partnership that has a
2:06
partner that is not your spouse. So,
2:08
your spouse can be a partner. We just
2:10
need another one who’s not your spouse.
2:13
We need a real business. If you have a
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hobby, the classic is that’s litigated
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all the time as a horse farm. Horse
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farms are almost always viewed by the
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IRS as a hobby and not a real business.
2:26
Same thing. I’ve seen this with people
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who collect cars. Now, I have seen
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people who have car collections and
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manage to convert it into a real actual
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business that honest to God attempts to
2:37
make money and periodically succeeds.
2:39
I’ve also seen people with car
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collections that try to make it a
2:42
business so they can write things off.
2:45
But when you look at it, it’s not really
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a business. It was never designed to
2:48
make money. It’s never going to make
2:50
money. It’s a hobby with an LLC wrapped
2:52
around it. We don’t want that. We want
2:54
an actual bonafideed real life business.
2:58
And I think you know in your heart of
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hearts whether or not you have a real
3:02
business, but we need to see that. Next,
3:04
we need the rental to be real. In other
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words, this can’t just be on paper. I’ve
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been in audits where a business paid a
3:12
person for a rental that turned out just
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to be on paper. Now, not only did the
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client lose because the rental wasn’t
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real. There was not actual activity.
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Nobody showed up at the house and did
3:23
things. It also enraged the IRS agent.
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They said, “Well, I wonder if you’re
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just willing to kind of not cheat, but
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play the game and just do this on paper,
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what else should we be looking for?” And
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the audit consequently metastasized. We
3:39
don’t want that. We need for there to be
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actual rental activity. What are some
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examples of rental activity that’s
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acceptable? The classic, your annual
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business meetings. Because in addition
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to being a tax lawyer, I do a lot with
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asset protection. One of my problems
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with clients entities, in particular
3:55
their LLC’s and corporations, they don’t
3:58
follow the necessary formalities to make
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the entity truly viable. They think they
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have asset protection and they don’t.
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One of the things that needs to be done
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every year is to have a legitimate
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bonafide meeting. Now, what’s an annual
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meeting for a company? It’s not that
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complicated. You talk business, usually
4:16
from a strategic level. You go through
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the plans for the business for the next
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year. what’s happening in the market. In
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fact, here’s what normally happens. You
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have friends that are in your business
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and you chitchat with them informally. I
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just want to make it a little more
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formal. Invite them over, record the
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meeting, have something to eat, take
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some notes. That’s one example. Employee
4:37
training, meeting with customers under
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certain circumstances that we’ll discuss
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in detail. These are examples of real
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rental activities, not something that’s
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just on paper. Next, we need to keep it
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legit. Part of keeping it legit is
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you’re really only going to do this for
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14 days or fewer during the year. Now,
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we hope you max it out and use all 14
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days, but certainly you can’t go over
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that number. Now, should you go over 14
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days, what happens? All the days are now
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taxable income to you. So, there’s no
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tax break. Your business gets a
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write-off for paying you for rental, but
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you have to declare all the rental
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income. All 15 days, let’s say, if you
5:13
did 15 days. So, you really want to
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stick to 14 days. Going over by one
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spoils everything. Next, if you’re
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taking the home office deduction on your
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tax return, typically on your 1040. So,
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you’ve got a business and you’re taking
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the home office deduction for any
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business, we need you to exclude the
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office from the rental. And we make it
5:34
easy for you. We have contracts pre-done
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that automatically exclude the home
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office. We have some recommendations on
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how to document that the home office was
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not included. Why do we do this? By the
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way, there’s a rule that the home office
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has to be exclusively used as an office.
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There’s an actual case where someone’s
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mother-in-law slept in the office one
5:54
night of the year and the home office
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deduction was completely disallowed.
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Why? Because it was not used exclusively
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for business. There was a tiny bit of
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personal use and that spoiled
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everything. So, we need to have if you
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have a home office, if you’re taking the
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deduction, it needs to be excluded and
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we make that easy for you. But we do ask
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you in our questionnaire, do you have a
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home office? So we can help you handle
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the implications. And of course, what
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we’re going to ask you to do is follow
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all, yes, all of our guidelines.
6:24
Otherwise, it may avoid the guarantee
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because we do promise that if there’s an
6:29
audit, we will represent. Now, I can’t
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promise we’ll win. That’s too random.
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The IRS life too random. If you follow
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our guidelines, odds are you’re going to
6:38
win. In fact, we want audits. We want
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the IRS to know eventually when they see
6:43
our application, they’re just going to
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give up and not fight. And there are
6:47
applications out there. There is
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software out there, for example, for
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salaries, for depreciation. And when the
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IRS sees this application, that part of
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the audit’s pretty much over. That’s the
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standard we want. Now, we don’t want you
7:00
to get audited. We’re not going to do
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anything to cause you to get audited.
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But we do want to win if you get
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audited. And for you to win, we need you
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to follow all of our guidelines, every
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one of them. If you do so in an honest
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and ethical manner, then we will
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guarantee to represent you in the audit.
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If you follow all of our guidelines and
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we represent, you’re not paying for us
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to represent you on this topic. We’re
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not going to run the whole audit, right?
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Right? If you’re getting audited on
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three issues and this is one of them, we
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will represent you on this issue free of
7:32
charge in the audit in tax court up to
7:36
but not including the trial. But for
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that to happen, we really need you to
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follow our guidelines, all of them,
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ethically and honestly.
