The Augusta Rule S Corp Deduction: How IRC 280A(g) Works

A client forwards you a post promising tax-free rental income from his own S corporation and asks whether it is real. The Augusta Rule S corp arrangement is real in the narrow sense that matters: the exclusion sits in the Code, and the IRS describes the mechanic in its own publications. The version being sold online is a different thing entirely.

One thing makes this hard to research properly. The IRS never uses the name. It appears in no publication, form instruction, or examination guide I read, so keyword searching returns sales copy instead of authority. I have flagged at the end where the sources stop.

What Is the Augusta Rule S Corp Deduction?

The Augusta Rule S corp deduction is an arrangement in which a shareholder rents a personal residence to his own S corporation for less than 15 days in the year, the corporation deducts the rent as a business expense, and the shareholder leaves the rent off his return under the minimal rental use rule at IRC Section 280A(g).

The rule itself is short. IRC Section 280A(g), "Special rule for certain rental use":

Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then ...

(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and

(2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.

Paragraph (2) is the individual side, and it is black-letter rather than administrative gloss. Paragraph (1) is not the corporate side: it disallows deductions arising because of the rental use of the dwelling unit, and says nothing about a separate taxpayer's deduction for rent it paid. Neither paragraph asks who the tenant is, or carves out a related party, an employer, or a corporation the taxpayer controls. That silence is the foundation the arrangement rests on, and silence is all it is.

Indiana Sales Tax Information Bulletin #41 corroborates the section number from an unexpected direction, granting a state exemption where a homeowner's rental "qualifies for the special rule for certain use under Section 280A(g) of the Internal Revenue Code, which provides an exemption from federal income tax when a primary residence is rented for fewer than 15 days."

Publication 527 adds the filing mechanic the statute leaves out, under the heading "Used as a home but rented less than 15 days":

If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn't considered to be rental and it shouldn't be reported on Schedule E (Form 1040). ...

How Does the 14-Day Exclusion Actually Work?

The exclusion is not a 14-day allowance but a less-than-15-days test, and it applies only when the taxpayer also uses that dwelling unit as a residence. Because days are counted whole, the largest count that satisfies it is 14 whole days, which is where the "14-day rule" label comes from.

Both the statute and Publication 527 set two conditions, not one. The day count is the condition everyone repeats. The residence condition gets skipped in the sales pitch, and it is why the rule does not reach a rental property the shareholder never occupies.

The statute defines the term at 280A(f)(1): "The term 'dwelling unit' includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit." Publication 527 carries the exclusion that matters here: "A dwelling unit doesn't include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment."

Publication 527 treats a unit as used as a home when personal use exceeds the greater of 14 days or 10 percent of the days it was rented at a fair rental price. For a shareholder's primary residence that is met without effort; for a lake house also rented to the public it is a real computation.

The same day count turns up on the corporate side, answering a different question. In the Instructions for Form 1120-S, the list the instructions head "Activities That Are Not Passive Activities" includes "the rental of a dwelling unit used by a shareholder for personal purposes during the year for more than the greater of 14 days or 10% of the number of days that the residence was rented at fair rental value." That list governs passive-activity classification, not the 280A question, and matters only as evidence that the same measure gets applied to a shareholder's residence.

One definition runs the opposite direction from where you would expect. Publication 527 defines fair rental price as "generally the amount of rent that a person who isn't related to you would be willing to pay," and warns against rent substantially below what similar local properties charge. That is written to catch rent set too low, and in the S corp arrangement the pressure runs the other way.

What Makes the Corporate Deduction Hold Up?

The corporate deduction holds up on the two tests every rent deduction faces: the property has to be used in the business, and the rent has to be reasonable. Both are general rules rather than entity-specific ones. Publication 334, the Tax Guide for Small Business, has the tightest wording but is written for sole proprietors filing Schedule C. Publication 535, Business Expenses, states the same two rules for businesses generally, and that is the version that reaches an S corporation.

On the first test, Publication 334 allows a rent deduction only for property the taxpayer uses in the business and does not own, and denies it outright where the taxpayer has or will receive equity in or title to the property.

The second test is where a related-party arrangement gets its attention. Publication 334, with Publication 535 carrying the same test: "You cannot take a rental deduction for unreasonable rents. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. ..." Related persons include immediate family, and the publication sends you to "Section 267 of the Internal Revenue Code" for the rest of the list.

IRS examination guidance reaches the same fact pattern from the audit side. IRM 4.10.3, Examination Techniques, instructs examiners to check "real estate holdings with rents, or inadequate rents on a yearly basis," and states the concern in the next column: "The corporation may be carrying the personal residence of the shareholder; constructive dividends."

No source I read addresses whether an accountable plan can carry this payment, so what follows is my reading of the business connection test rather than anything the government says. Treas. Reg. 1.62-2(d)(1), subject to the exceptions in (d)(2) and (d)(3), requires that the arrangement provide reimbursements "only for business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer." Rent for the use of the shareholder's own house is not an expense incurred in performing services. It is consideration for the use of property, which puts it outside that sentence. On that reading the accountable plan is the wrong vehicle, and the payment belongs on the corporation's rent line, supported by an agreement and an invoice, rather than inside an expense report.

There is also a tradeoff most write-ups omit. IRM 4.10.10 carries a standard examination paragraph for this exact collision: "If you rent all or part of your residence to your employer and use the rented portion when performing services for that employer, you cannot deduct home office expenses attributable to the rental." For a client with a meaningful home office, giving that up can cost more than the rent arrangement returns.

Substantiation That Survives an Exam

Suppose a corporation uses a shareholder's home twelve days in the year and local comparables support $900 per day. The deduction is $10,800. The $900 is illustrative and is not a benchmark. It has to come from comparables you can put in the file, because the standard is what you would pay a stranger, not what a spreadsheet produces working backward from a target.

Beyond the rate, the file needs what makes a transaction look like a transaction. A written agreement signed before the fact. Corporate minutes stating the business purpose of each use. Dated comparable quotes from local venues, tested on purpose, size, condition, furnishings, and location the way Publication 527 tests them. A day-by-day log, so the less-than-15 count is a record and not a reconstruction. An invoice and a separate payment, not a year-end journal entry. And nothing on Schedule E, which is what Publication 527 tells you to do.

If the position is large enough to matter, write it up while the facts are fresh, the way you would document any position you expect to defend or a Section 199A analysis.

Bottom Line

Here is what the sources do not establish, so you can give confident claims on these points the suspicion they have earned.

No source addresses the arrangement as a package, and Section 280A(g) does not close the gap. Publication 527 covers the individual side and Publications 334 and 535 cover the business side, but nothing I found analyzes the shareholder exclusion and the corporate deduction together for a shareholder renting to his own S corporation. Each half rests on its own authority, and the conclusion that they combine is an inference. A reasonable one, but know that is what it is when you sign the return.

Nothing addresses the accountable plan question either. The reading above follows from the text of Treas. Reg. 1.62-2(d)(1), but no source states it.

There is no safe harbor rate. No per-day dollar figure appears in any source I read. Anyone quoting one is quoting a marketing deck, not the government.

And I found no case law on Augusta substantiation to put in front of you, so I am not going to name a decision I have not read. If a post you come across cites one, pull the opinion before you rely on it. A case name is the cheapest thing in tax content to fabricate and the most expensive thing to be wrong about.

That is what pushed me to build Tax Orator. Answering this properly meant pulling nine documents: the statute, three IRS publications, a form instruction, two IRM sections, a Treasury Regulation, and a state revenue bulletin. The term every client searches for appears in none of them. For a practitioner billing his own hours, that afternoon is the margin on the engagement.