The Augusta Rule Has Two Pipes. Your CPA Is Watching the Wrong One.
Three guys in Mississippi rented their homes to their own S-corp. They claimed $290,900 in rent. The Tax Court allowed $16,500.
The court never attacked the Augusta Rule.
The Rule Everyone Knows
Section 280A(g) of the tax code says you can rent your home for 14 days or fewer per year. The rental income is tax-free. You don't even report it. That's the Augusta Rule. It's still on the books. The One Big Beautiful Bill Act (OBBBA) didn't touch it.
Your S-corp pays you rent. You keep the cash. The business writes off the expense. Clean. Simple. Legal.
Except the business deduction doesn't live in §280A(g). It lives in a completely different statute.
The Second Pipe
The rent your S-corp pays has to qualify as an "ordinary and necessary" business expense under Section 162. Different section. Different test. Different burden of proof.
Think of it as two pipes running through the same wall. Pipe One (§280A(g)) carries your tax-free income. Pipe Two (§162) carries the business deduction. Your CPA is watching Pipe One. The IRS is cutting Pipe Two.
In Sinopoli v. Commissioner, the IRS didn't argue that the Augusta Rule was invalid. It argued the rent wasn't a real business expense. The court agreed.
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The Hinge
The court looked at meeting notes. That's it.
The IRS found no notes for 2015. No agendas. No minutes. Nothing on paper that proved a business meeting happened in those homes. It disallowed the entire year.
The court gave some of it back. It accepted testimony that meetings did happen and allowed $500 for each one — $6,000 for the year. But that's $6,000 against $96,400 claimed.
In 2016 and 2017, the owners had notes. The court allowed $500 per meeting. The IRS did its own market research and decided $500 for a half or full day was the fair rate. The court called even that "generous."
So. $290,900 claimed. $16,500 allowed. Not because the Augusta Rule failed. Because the meeting notes did.
It Gets Worse
In Jadhav v. Commissioner, a married couple ran the same play. Their S-corp paid rent for use of their home. They relied on a rate from a tax strategy firm instead of doing their own research.
Total disallowance. Plus penalties.
The court said the payments were for "something other than rent."
Right.
The court characterized the payments as a tax savings scheme to distribute the S-Corp's earnings through purported rent payments.
I mean. The court didn't mince words.
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The Cascade
When the §162 deduction dies, the expense vanishes from the S-corp's books. Net income goes up. That income flows through to you on a K-1. Your taxable income rises.
Look. It gets worse from there. The One Big Beautiful Bill Act made the 20% QBI deduction permanent. QBI is the pass-through break. It drops your effective top rate from 37% to roughly 30%.
The rent deduction vanishes. The S-corp's net income jumps. Your QBI number on the K-1 jumps too. You lose the deduction. And you pay more on the income that just got bigger.
Two hits. One audit. OBBBA locked QBI in place forever. The cascade doesn't expire.
Sure.
The Close
The Augusta Rule is fine. Section 280A(g) is right where Congress left it in 1976. The IRS does not need to kill it.
It reads your meeting notes. Or doesn't find any.
Then it cuts the other pipe. And the water goes everywhere.
