How to utilize strategic deductions to maximize your returns, and other insider tips.
Managing capital, including allocating it to the right places, is one of the most important skills in business, as is being able to effectively manage systems and processes while contributing value to the world.
Real estate can be a puzzle in terms of investing as an entrepreneur. Is it better to buy a building for your company and commit to large overhead and responsibility for the long term, for example, or should you embrace renting and its inherent flexibility for a rapidly scaling business and/or for responding to unforeseen economic circumstances? These are questions that beginning and seasoned executives alike will likely confront eventually.
In my experience, there are three real estate-related areas they should explore in order to maximize return and create bottom-line results.
1. Utilize the Augusta Exemption
One place that entrepreneurs don’t often think of spending money is in themselves. The popular name for Internal Revenue Code Section 280A(g), the Augusta Exemption allows you to rent your house out to anyone, including your business, for up to two weeks every year (based on the fair market value of short-term rentals in your area).
Many company owners look for ways to reward their employees and otherwise build relationships with their executives or staff, so consider renting your home to your business for single- or multi-day events in order to do that. This kind of gathering can be a backyard employee barbeque or team-building activities with individual departments. As long as you’re honestly using your house as a meeting place and only do so for a maximum of 14 days per year, you are allowed to charge your business a fair market value for it and you’ll be able to take this money tax-free.
2. Purchased property write-offs
All businesses have start-up costs. Money spent on inventory, equipment, website, R&D, etc. is part of what’s called your “basis.” The broad definition of that term is expenditures that must work for you in the short and long haul in order to succeed as a business, but it’s important to note that this money shouldn’t be claimed as taxable income.
If you decide to purchase your own building, that cost becomes a part of your basis. Additionally, if the company only occupies a portion of the building and you rent out its other available space, you’re able to write off certain costs associated with its management and upkeep.
3. Home office deductions
If you’ve created a business in the last two years, there’s a good chance that remote teams and workers have played a part — allowing you to thrive and scale. You may not even be renting out a single office space for yourself. Instead, many entrepreneurs are able to work from home and manage staff members through project management and CRM software.
Those who fit into this category can also save money on taxes by writing off their home office, and that deduction applies to renters, too. So long as you’re using a designated area of the home exclusively for business (even if it’s not the only location where you do so), you are able to use that square footage divided by the total home square footage as a deduction.
It’s easy to get wrapped up in business operations and to forgo making the most of your money through deductions and other tax provisions. But if you plan ahead and make smart decisions regarding team building events, capital allocation into real estate and utilizing designated home office space, you can get further ahead and build an enterprise that serves more customers, employs more people and allows you to live the life you deserve.
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