For many Americans, navigating the IRS and tax filing is one of the most challenging, confusing and puzzling tasks. From figuring out complicated forms to navigating deductions, no walk in the park. To help de-mystify the process, financial TikTokers and influencers have turned to their social media platforms to share strategies for saving money during tax season.
One such influencer, Vivian Tu, recently shared a TikTok video explaining how business owners can save serious money on their taxes by hosting work retreats at their homes.
If you’re a business owner, this may sound too good to be true. But is it? Here’s a breakdown of Tu’s recommendations, along with expert insights on whether her claims are accurate and — perhaps even more importantly — whether it’s ethical for small business owners to use this tax maneuver.
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In her TikTok video, Tu used a playful skit to illustrate her point. She portrayed a frustrated employee who wants this year’s work retreat to be somewhere cool, like Vegas or Tahoe and not at the business owner’s house — again. Playing the business owner, Tu responded to the disgruntled employee with the following bold claim.
“Because those business owners are idiots.” Tu said. “They’re spending thousands of dollars a night on hotels while the government is going to subsidize our retreat. I own the business and I rent out my house to the company for our retreat and the company pays me, the individual. Not only is it legal, it’s tax-free.”
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While the employee questions the legality of the strategy, Tu, as the business owner, cited the Augusta Rule as the basis for her claim.
“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,” Tu said. “You can rent out to individuals looking for a vacation or businesses, including your own, for corporate purposes. We had a killer year as a company and this is a great way to move income away from the business and shift it to my personal income, tax-free.”
Tu’s TikTok video highlighted how the Augusta Rule can help business owners make money. While her hypothetical scenario almost seems good to be true, how does this rule hold up in real life?
To break it down, we turned to Crystal Stranger, senior tax director of OpticTax with over 20 years of experience in finance and accounting.
“Any rental of a primary residence for less than 15 days is not taxable income, Stranger said. This income does not need to be reported on the tax return and should not be included on a Schedule E form.”
So, does Tu’s advice check out? Stranger said what Tu shared is accurate, but some additional details not included in the TikTok video are important to know.
“While Tu is correct that under the Augusta Rule, you can rent a house for 14 days or less and not have to report the income, this is not taking other rules into account,” Stranger said. “There are a couple of other rules that could make this not deductible, depending on the business activities:”
While Tu’s advice is rooted in validity, TikTok’s short-form videos leave little room for nuance. Stranger pointed out two important caveats that business owners should keep in mind before implementing this strategy.
To comply with the Augusta Rule, the rental amount the business owner (and homeowner) charges the business, must align with fair market rates.
“If you are renting space in your home to your company to host a retreat, then you would need to show that the rental value paid by the company is a fair market rate,” Stranger said. “It could be challenging to set this value with any certainty, as event space is priced at many varying levels. What you would pay in a hotel or event space established for this purpose may not be equal to what you would pay for use in a private home.”
Providing documentation — such as comparable rates from platforms like Airbnb or a professional appraisal — can help display that the rental amount aligns with the market rates and complies with the Augusta rule.
To abide by the Augusta Rule, maintaining documentation of business activity is critical.
“If the ‘retreat’ is just family members in a closely held business, then it would be extremely hard to prove this was not just held for tax purposes and that business activities actually occurred,” Stranger said. “Not that it wouldn’t be possible to hold a retreat in that instance, but you would need to document the retreat with detailed meeting minutes and activity records. I would even suggest video footage so that if this is questioned later you can prove that the intent was fully business related.”
While the IRS acknowledges the rule, its use is closely scrutinized when homeowners rent to their own businesses. To avoid any penalties and unwanted IRS attention, it’s best to diligently follow the regulations in this care.
While the Augusta Rule can be a legitimate money-saving tool, Stranger said it’s not widely used.
“From the thousands of business clients I’ve worked with, nobody I can think of has ever used this rule to host a retreat at their home and deduct the costs on the business side while having the income be tax-free to the individual. So it is not common,” Stranger said. “However, it is common to rent space to a third party for less than two weeks and not report that income, I have seen that many times.”
Now comes the bigger question. Although Tu, in the video, assured the legality of using the Augusta Rule to make some extra money, what do tax experts think about its ethics?
“I don’t think it would necessarily be unethical to utilize the Augusta Rule in this way, but to do this correctly you would need to document both the fair market value charged for the rental and the business purposes,” Stranger said.
“From my experience, only some taxpayers are that well organized to do this well,” she added. “That’s what makes this type of tax advice on TikTok always a little questionable. While the tactics may not be illegal or unethical, they often require some finesse to implement legitimately and that is lost in the short video tax tip format.”
So long as the Augusta Rule is used to genuinely host business activities and the criteria outlined by the IRS are followed, it is a fair and legal tax strategy for homeowners who are business owners to leverage. Stick to the guidelines and enjoy the extra money in your pocket.
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This article originally appeared on GOBankingRates.com: Money Influencer Vivian Tu: This Tax Hack Can Save Business Owners Big Money
