The Augusta Rule for S Corp Clients: The Documentation File a Reviewer Expects

The Augusta rule shows up on an S-corp return as one line: rent expense. That line reads the same whether the file behind it holds signed minutes, three venue quotes and twelve invoices, or a number the owner picked at a planning meeting. Nobody can tell which from the return. The only check is the file.

In an S corporation the rule has two sides. The corporation deducts rent it pays the owner for using the owner's home for business meetings. The owner, if the home is used as a residence and was rented for fewer than 15 days in the owner's taxable year, leaves that rent out of income under §280A(g). The two positions have different legal tests and can fail independently, but they draw on the same facts, so one missing document can weaken both.

This guide is for the firm that gets asked about the Augusta rule by S-corp clients every planning season. It covers what the statute text says, how the day count works, what fair-rent evidence looks like, and the file a Reviewer should expect before signing off: minutes, a rental agreement, an invoice per event, payment from the corporate account, and a meeting log. It closes with illustrative numbers, a Reviewer checklist, and how the rule sits next to the owner's reasonable compensation.

What is the Augusta rule? The Augusta rule is the common name for IRC §280A(g). If a dwelling unit is used by the taxpayer as a residence during the taxable year and is actually rented for less than 15 days during that year, no deduction is allowed because of the rental use, and the rental income is not included in gross income under §61. For an S-corp client, the corporation may deduct rent it pays the owner under IRC §162(a) only when the rent is an ordinary and necessary business expense: a real business use of the home on each day billed, at a fair rental a stranger would pay. The owner's exclusion depends on the home being rented 14 days or fewer in the owner's taxable year, counting every renter. Rules as of 2026-09-26. Not tax advice.

Key Takeaways

• The statute is short: §280A(g) applies when a residence is actually rented for less than 15 days in the taxable year; the rental income is excluded and no deduction is allowed because of the rental use (IRC §280A(g)(1), (2)).
• Two sides, one file: the S corporation deducts the rent under IRC §162(a); the owner excludes it under §280A(g). The tests differ, but weak evidence can undermine both.
• The count is days rented, not days used: every day the home is actually rented counts toward the 14, to the corporation or anyone else, in the owner's taxable year.
• Fair rent means a stranger's price: rent paid to a related person is reasonable if it is the amount the business would pay a stranger for the same property (IRS Pub. 334 (2025)). Three comparable quotes and a rate memo carry that point.
• The file has six core parts plus fair-rent support: minutes, a rental agreement, an invoice per event, corporate payment records, a meeting log with agenda and attendees, and evidence of business purpose, with the comp set and rate memo kept alongside.
• Rent is not wages: it is a §162(a)(3) rental, not §162(a)(1) compensation, and it does not reduce what the Reasonable Compensation Study supports as salary.

What §280A(g) actually says

Start with the text, because most client questions about the Augusta rule tax treatment are answered by it. The subsection reads:

"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." (IRC §280A(g))

That sentence carries three conditions and two results.

Condition 1: a dwelling unit. The term "includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit" (IRC §280A(f)(1)(A)). It does not include a portion of a unit used exclusively as a hotel, motel, inn, or similar establishment (IRC §280A(f)(1)(B)).

Condition 2: used as a residence during the taxable year. A taxpayer uses a unit as a residence if personal-use days exceed the greater of 14 days or 10 percent of the days the unit is rented at a fair rental (IRC §280A(d)(1)). An owner's principal home will usually clear that easily. A second home the owner rarely visits may not, and the file should say which home it is.

Condition 3: actually rented for less than 15 days. Fourteen days is the ceiling. The word "actually" matters for the count, covered below.

Result 1: no deduction "because of the rental use." The owner can't deduct depreciation, utilities or cleaning against the rent. IRS Publication 527 (2025) says expenses from the activity "are not considered rental expenses," while mortgage interest, property taxes and qualified casualty losses are still reported "as normally allowed" on Schedule A.

Result 2: the rental income stays out of gross income. Pub. 527 puts it plainly: if you rent property you also use as your home for less than 15 days during the tax year, "don't include the rent you receive in your income," and the activity isn't reported on Schedule E.

The nickname appears nowhere in the Code. When the Augusta rule IRS question comes from a client, the answer is §280A(g), and the file should cite it that way.

The S-corp structure: one payment, two tax positions

Most Augusta rule S corp arrangements look like this. The owner holds board meetings, planning sessions or team meetings at the home. The corporation pays the owner rent for those days. The corporation deducts the rent. The owner excludes it. Each side has its own authority and its own proof.

The corporation's side

An S corporation computes taxable income "in the same manner as in the case of an individual," with listed exceptions (IRC §1363(b)). Its deduction for the rent rests on §162(a), subject to the Code's other limits: "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including... (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity."

Because the landlord is a shareholder, the two parties may be related, and reasonableness is the pressure point. IRS Publication 334 (2025) is written for sole proprietors, not S corporations, but its statement of the standard is the clearest in IRS guidance: "You can't 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."

Read together, three facts support the corporate deduction: business use, a fair rental amount, and the corporation's payment. A fourth, the owner's rental-day count, supports only the owner's exclusion. The file should document all four:

Keep the corporate-side authority at that level. The statute and the IRS publications set the frame: ordinary and necessary, for the business, at a stranger's price. How much evidence of business use is enough in a given case is a judgment for the Reviewer. One timing question sits outside this guide: if the corporation accrues rent at year end that it hasn't paid to the owner, the related-party timing rule for accrued amounts owed to a cash-method payee (IRC §267(a)(2)) needs its own analysis before the deduction is claimed. For that rule, every shareholder of an S corporation counts as related, whatever the ownership percentage (IRC §267(e)(1)(B)(ii)).

The owner's side

The owner is the "taxpayer" in §280A(g). If the home is a residence under §280A(d)(1) and is actually rented for less than 15 days in the owner's taxable year, the rent is excluded from gross income and the owner claims no deductions because of the rental use (IRC §280A(g)(1), (2)).

How it reaches the K-1

The rent is a deduction in figuring the corporation's nonseparately computed income, defined as "gross income minus the deductions allowed to the corporation under this chapter, determined by excluding all items described in paragraph (1)(A)" (IRC §1366(a)(2)). Each shareholder takes into account a pro rata share of that figure (IRC §1366(a)(1)(B)), computed per share, per day (26 CFR §1.1377-1(a)(1)). So the rent lowers ordinary business income on every shareholder's K-1, in proportion to ownership when ownership holds steady all year, while the rent itself goes only to the shareholder whose home was used. That split matters when there's more than one owner; the worked example shows it.

The rest of your S-corp planning sits on the same return. The tax planning hub groups the other strategies firms document the same way.

The 14-day count

The count is the easiest part of the file to get wrong without noticing. Four points from the text and from Pub. 527.

Days rented, not days used. The test is whether the unit "is actually rented for less than 15 days during the taxable year" (IRC §280A(g)). Personal-use days feed the separate residence test under §280A(d)(1). They don't count against the 14. A day the home is available for rent but not rented "isn't a day of rental use" (Pub. 527 (2025)).

Every renter counts. The statute counts days the unit is actually rented. It doesn't limit the count to rentals to the corporation. If the owner also rents the home for four days during a local event, those days count. The owner's day log has to cover every rental, not just the corporate meetings. Your firm usually can't see those other rentals unless it asks.

The year is the owner's taxable year. The taxpayer in §280A(g) is the person receiving the rent, so the 14 days run over the owner's taxable year, usually the calendar year. If the corporation uses a fiscal year, the corporate meeting log and the owner's day log run on different calendars; the file should reconcile them.

The 15th day is a cliff. At 15 rental days or more, §280A(g) no longer applies. Pub. 527 (2025): if you use a dwelling unit as a home and rent it 15 days or more, "include all your rental income in your income," and divide expenses between rental and personal use under the rest of §280A. The owner doesn't lose only the 15th day; the exclusion is gone for the year.

A counting convention helps. The statute text doesn't define a partial rental day, so the file should state the firm's convention; counting any day with a rental, of any length, as a full rental day is the cautious one. Set the plan at a number below 14 so a make-up meeting doesn't push the year over.

Fair-rent evidence

The rate is the corporate-side figure a Reviewer can test against outside evidence. Pub. 334's standard is concrete: the amount the business would pay a stranger for the same property. Pub. 527 (2025) describes a fair rental price in similar terms, "the amount of rent that a person who isn't related to you would be willing to pay," and lists comparability questions: same purpose, approximately the same size, approximately the same condition, similar furnishings, similar location. Pub. 527 writes those questions for a different test, but they're a sensible frame for choosing comparables here.

The comp set: three quotes

Get three written quotes from comparable local venues, for the same use, dated before the first meeting of the year. Comparable means private meeting space for the same headcount, in the same area, for the same length of day. Record what each quote includes, because a venue price often bundles catering, AV or staffing the home doesn't provide.

The rate memo

The memo turns three quotes into one rate and says why. Keep it to a page.

Rate memo: meeting-space rental, [Corporation], tax year [YYYY] Use: [meeting type], [headcount], [hours per day]. Comparables: Venue 1 $[rate], Venue 2 $[rate], Venue 3 $[rate], quotes dated [dates], saved at [file path]. Adjustments: removed [catering / AV / staffing] from quotes that bundled them; no adjustment for [item] because [reason]. Rate selected: $[rate] per day, the [median / low end] of the adjusted quotes, because [reason]. Home facts: [room(s) used, capacity, furnishings, parking] with photos at [file path]. Prepared by: [Preparer], [date]. Signed off by: [Reviewer], [date].

The Code has no three-quote or median safe harbor. The median of adjusted quotes is a reasonable pick only when the comparables really are comparable, and the memo should say why the chosen point fits this home and this use. A rate above the highest quote has nothing behind it.

Why a hotel suite rate fails

A hotel suite rate prices lodging: a bed, a bathroom, housekeeping, a night. The meeting is daytime use of a room. A suite rate also bundles services the home doesn't provide. Measured against Pub. 527's comparability questions, it fails "same purpose" before anything else. (Section 280A(f)(1)(B), which excludes from the dwelling-unit definition a portion used exclusively as a hotel, motel or inn, is a separate rule; it doesn't decide whether a hotel quote is a valid comparable.)

Why a guess fails

A rate with no source is a number nobody can check. It reads the same on the return as a sourced rate, and it falls apart at the first question. Every figure in the file should trace to a quote, a date and a saved copy. That's the same source-citation habit that survives an IRS notice: the number, where it came from, and when.

The file: what goes in it

Here is the file a Reviewer should expect before signing off on the Augusta rule position. Build it as the year runs, not in March.

1. Minutes authorizing the meetings

The corporation's minutes should authorize the rental before the first meeting, name the rate memo, and cap the days.

Resolution: rental of meeting space RESOLVED, that the Corporation rent meeting space at [address], a residence owned by [Owner], for Corporation business meetings in tax year [YYYY], not to exceed [N] days; RESOLVED FURTHER, that rent be paid at $[rate] per day, the rate supported by the rate memo dated [date] based on three quotes from comparable local venues; RESOLVED FURTHER, that each meeting be documented with an agenda, an attendee list and notes, that the Owner issue an invoice for each meeting, and that the Corporation pay each invoice from its business account. Adopted [date]. [Signatures per the Corporation's governing documents; an interested director abstains where the bylaws require.]

2. A rental agreement

A short written agreement between the corporation and the owner. Key terms:

3. An invoice per event

4. Payment from the corporate account

Pay each invoice from the corporation's business account to the owner's personal account, one payment per invoice or a reconciled batch. The bank record, the invoice and the general ledger entry should tie. Cash, personal-card payments, or a year-end journal entry with no transfer weaken both sides: the corporation has less to show it paid, and the owner's day count has nothing independent behind it. An unpaid year-end accrual owed to the owner also raises the §267(a)(2) timing question noted above.

The payment also carries a filing duty. A business that pays rent in the course of its trade or business files an information return for it under IRC §6041(a) when the year's rent to the owner reaches the reporting threshold: $2,000 or more for payments made in 2026, $600 or more for payments made before 2026 (IRS Notice 2025-62). The rent goes to the owner on Form 1099-MISC. The owner's return workpaper should show how the excluded rent is handled, so the form doesn't read as unreported rental income.

5. A meeting log with agenda and attendees

6. Evidence of the business purpose

The agenda states the business purpose; the notes and outputs show the meeting happened. A meeting with no agenda, no recorded business activity, and only household members present is the hardest entry to support. Employees, advisers or board members in the room and decisions on the record make the entry stronger. Section 162 doesn't require proof that meeting in person was indispensable, only that the use was ordinary and necessary for the business. Photos of the room as set up, a sign-in sheet, and the follow-up email with action items cost nothing to keep.

File index

This is the same discipline your firm applies to reasonable compensation documentation workpapers: every figure sourced, every judgment written down, the Reviewer's sign-off on the record, and the file kept with the return.

One overlap to check

If the owner is also reimbursed for a home office under the corporation's accountable plan, the file should show the rented space and days aren't also counted in that reimbursement. Two arrangements covering the same room on the same day invite the question of which one the corporation paid for.

Illustrative example: 12 meeting days

Illustrative example based on a common client profile. The owner holds 100% of an S corporation on a calendar year. The Reasonable Compensation Study supports a salary of $120,000, which the corporation pays through payroll. Before any rent, the corporation's ordinary business income, after that salary, is $260,000.

The corporation holds 12 business meetings at the owner's home during the year. The home is not rented to anyone else.

Fair rate. Three adjusted quotes for comparable private meeting space: $1,200, $1,350 and $1,500 per day. The rate memo selects the median, $1,350 per day, which is also the average.

Rent. 12 days × $1,350 = $16,200, invoiced per meeting and paid from the corporate account.

Corporation. Ordinary business income falls from $260,000 to $260,000 − $16,200 = $243,800.

Owner.

The owner's included income from the corporation is $16,200 lower, the amount of the rent, because 12 days is under 15 and the file supports a business use at a fair rental. The owner also has $16,200 of cash from the rent that, without the arrangement, would have stayed in the corporation or come out as a distribution. What that change is worth depends on the owner's marginal rate, state, and everything else on the return, so the firm's memo should state the income effect, not a promised tax figure.

Wages don't move. Salary is $120,000 in both columns. The rent doesn't change the wage figure or the payroll figures computed on it.

Two owners. Change one fact: the owner holds 60% and a second shareholder holds 40% for the whole year, and only the 60% owner's home is used. The $16,200 deduction lowers K-1 income pro rata: $9,720 for the 60% owner and $6,480 for the 40% owner (IRC §1366(a)(1); per-share, per-day allocation under 26 CFR §1.1377-1(a)(1), which gives the same split when ownership doesn't change). The 60% owner receives all $16,200 of rent. The 40% owner bears part of the deduction for rent paid to someone else, so the file should show the arrangement was approved as the corporation's governing documents require.

The 15th day. Change a different fact: the owner also rents the home for 4 more days at $900 a day during a local event. Total rental days: 12 + 4 = 16. Section 280A(g) no longer applies. Under Pub. 527, the owner includes all the rental income, $16,200 + (4 × $900) = $19,800, and allocates expenses under the rest of §280A. The corporation's deduction doesn't depend on the owner's count, but the owner's exclusion is gone for the year.

The hotel suite rate. Change the rate instead: the owner bills at a $2,400 hotel suite rate. 12 × $2,400 = $28,800, which is $28,800 − $16,200 = $12,600 above the rate the comp set supports. That $12,600 has no comparable behind it.

This ignores state treatment, payroll-linked costs, and the owner's other income. Actual results vary based on income, industry, and state.

Rent is not wages

The Code lists them separately. Section 162(a)(1) covers "a reasonable allowance for salaries or other compensation for personal services actually rendered." Section 162(a)(3) covers "rentals or other payments required to be made as a condition to the continued use or possession" of property. The Augusta rule payment is rent for the use of property. It isn't pay for the owner's work.

That has two consequences for the file.

First, the rent does nothing to meet the reasonable-compensation requirement. An owner who works in the business still needs a salary supported by evidence about duties, time and what comparable work pays. An arrangement that pays the owner $16,200 of rent and a thin salary has the same salary problem it had before, plus a second position to defend. The firm's piece on what happens when an S-corp owner takes no salary covers that exposure.

Second, the rent and the salary should never be set against each other. The Study supports the salary from wage evidence. The rate memo supports the rent from venue quotes. Neither number is a plug for the other, and the file should show each one's source separately.

What Reviewers and examiners look for

The questions come back to four issues: business use, fair rate, and payment on the corporate side, and the day count on the owner's side. Failure patterns to screen for:

• No business use behind the day. A "meeting" with no agenda, no attendees outside the household, and no output. Family gatherings billed as board meetings.
• A rate with no comparable. A hotel suite rate, an event-venue rate for a much larger space, or a round number with no quote behind it.
• Documents made after the fact. Minutes, agreements and invoices all dated in March of the following year, in one batch.
• Payment that doesn't tie. One year-end transfer, a journal entry with no cash, payments from a personal account, or an unpaid year-end accrual deducted without the §267(a)(2) analysis.
• A day count that ignores other renters. Short-term rental nights the firm never asked about push the owner to 15 or more.
• Days billed that exceed days documented. Fourteen invoices, eight agendas.
• The rent treated as a substitute for salary. A thin salary justified by "the owner gets paid through rent."
• An overlap with an accountable-plan home office reimbursement for the same space and days.

This guide cites no case law. Before the firm's client memo relies on how courts have treated these arrangements, research the current cases, cite the specific authority, and explain how its facts match the client's.

Reviewer checklist

Where it sits in the planning memo and the deliverable

If your firm sends a written S-corp tax planning memo, the Augusta rule belongs as its own recommendation line, with the same four fields as every other line: the recommendation, the source figure with its as-of date (the rate memo and the day cap), the assumption (no other rental days), and the Reviewer's sign-off. It shouldn't sit inside the Salary section, because it isn't salary.

In the client-facing report, the line should show the income effect, the conditions the owner has to keep, and what the owner owes the file each quarter: agendas, invoices, the day log. The anatomy in what a tax planning report should contain fits this line without changes.

Where the Reasonable Compensation Study fits

It doesn't cover the Augusta rule. The Study documents the owner's salary, the one number the rent can't replace. What carries over is the discipline. A Study traces every figure to its source, records each judgment with a rationale, and puts the Reviewer's sign-off on the record, and the Firm keeps the workpapers. A good Augusta rule file works the same way: a rate traced to three quotes, a day count traced to a log, a payment traced to a bank record, and a Reviewer who signed before the return went out.

For an S-corp client with both positions on the return, the Study's salary figure and the rate memo's rent figure sit side by side in the file, each with its own source.

Frequently asked questions

What is the Augusta rule in the tax code?

It's IRC §280A(g). If a dwelling unit used as a residence during the taxable year is actually rented for less than 15 days that year, the rental income isn't included in gross income and no deduction is allowed because of the rental use.

Can an S corporation deduct rent paid to its owner for meetings at the owner's home?

Rent is deductible under IRC §162(a)(3) when it's an ordinary and necessary business expense. Where the owner and the corporation are related, the rent should be the amount the corporation would pay a stranger for the same use (IRS Pub. 334 (2025), which states the standard for sole proprietors). The file has to show a real business use on each day billed.

Do days rented to someone other than the corporation count toward the 14?

Yes. Section 280A(g) counts days the home is actually rented during the taxable year. It doesn't limit the count to one renter, so short-term rentals and event rentals count too.

What happens on the 15th rental day?

Section 280A(g) no longer applies for that year. Under IRS Pub. 527 (2025), the owner includes all the rental income and divides expenses between rental and personal use under the rest of §280A.

Can a hotel suite rate support the daily rent?

It's a weak comparable. A suite prices overnight lodging and bundled services, not daytime meeting space. Quotes from comparable local meeting venues for the same headcount and hours are the stronger evidence.

Does rent from the corporation count toward the owner's reasonable compensation?

No. Rent is a payment for the use of property under §162(a)(3), not compensation for services under §162(a)(1). The owner's salary still has to be supported on its own evidence.

Does the rent change the owner's K-1?

Yes. The corporation's rent deduction lowers its nonseparately computed income, and each shareholder takes a pro rata share of that figure, computed per share, per day (IRC §1366(a)(1)(B), (a)(2); 26 CFR §1.1377-1(a)(1)). With more than one shareholder, every owner's K-1 falls while only the host owner receives the rent.

Sources and as-of dates

Conclusion

The Augusta rule is one sentence of statute. In an S corporation it becomes two positions, a corporate rent deduction and an owner exclusion. Their legal tests differ, but both draw on one file: minutes, an agreement, a sourced rate, an invoice and payment per day, a meeting log, and an honest day count across every renter. Build that file as the year runs, keep it apart from the salary, and have the Reviewer sign off on it before the return is filed.

TracePrep ships the Reasonable Compensation Study, which documents the evidence behind the owner's salary, the number the rent never replaces. Every figure traces to a source, the Reviewer signs off before it's final, and the workpapers stay with the Firm.

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Not tax advice.

TracePrep is a software product from TracePrep Inc., not a CPA firm. This content is operator experience for educational purposes; it is not tax advice and has not been reviewed by a licensed CPA. Consult a qualified tax professional for guidance on your specific situation. Source citations in TracePrep workpapers support audit defense but do not guarantee IRS outcomes.