IRC 280A: Home Office Deduction, Augusta Rule, and Vacation Home Rules -- Practitioner Guide

1. Introduction

IRC 280A governs the deductibility of expenses allocable to a dwelling unit used for both personal and business purposes. The provision encompasses three distinct planning areas that practitioners must master separately: the home office deduction for business use of a residence (IRC 280A(c)(1)), the Augusta Rule short-term rental income exclusion (IRC 280A(g)), and the vacation home expense allocation framework (IRC 280A(d) and (e)).

The One Big Beautiful Budget Act (OBBBA), enacted July 4, 2025, materially changed the home office landscape. OBBBA Section 70110 permanently eliminates the IRC 280A home office deduction for W-2 employees for tax years beginning after July 4, 2025. This change affects not only traditional employees but also S-corp shareholder-employees who receive W-2 compensation from their own corporations. The statutory change is permanent and does not sunset.

This guide addresses each of the three IRC 280A topic areas in sequence, identifies the OBBBA impact at each relevant point, and provides practitioner guidance on planning alternatives, computation methods, and documentation requirements. All statutory references are to the Internal Revenue Code as amended through the OBBBA (Public Law 119-21).

2. Home Office for W-2 Employees: OBBBA Permanent Disallowance and Accountable Plan Alternative

Prior Law and the TCJA Bridge

Before the Tax Cuts and Jobs Act of 2017 (TCJA), W-2 employees could deduct unreimbursed employee business expenses, including home office expenses, as miscellaneous itemized deductions subject to the 2% adjusted gross income floor under IRC 67. The TCJA suspended all miscellaneous itemized deductions subject to IRC 67 for tax years 2018 through 2025. The result: employees had no available deduction for home office expenses during the TCJA suspension period.

OBBBA Section 70110: Permanent Disallowance

The OBBBA did not restore the prior-law employee deduction when the TCJA provisions expired. Instead, OBBBA Section 70110 permanently eliminates the home office deduction for W-2 employees under IRC 280A for any tax year beginning after July 4, 2025. The disallowance is categorical: employees cannot claim home office expenses under IRC 280A, regardless of whether they otherwise satisfy the exclusive use, regular use, and qualifying purpose tests that apply to self-employed taxpayers.

The prohibition applies to all W-2 wage earners, including:

• Traditional employees of third-party employers
• S-corp shareholder-employees receiving W-2 wages from their own S-corporation
• Corporate officers compensated by W-2

The Accountable Plan: The Only Post-OBBBA Employee Path

The only viable planning alternative for employees whose employers are willing to cooperate is the employer accountable plan, which operates under IRC 162 and IRC 132(d):

1. The employer reimburses the employee for documented, substantiated home office expenses under a plan that meets the accountable plan requirements of Treas. Reg. Section 1.62-2: the expenses must have a business connection, be adequately substantiated, and any excess amounts must be returned to the employer.
2. The employer deducts the reimbursements as ordinary and necessary business expenses under IRC 162.
3. The employee receives the reimbursement tax-free as a working condition fringe benefit excluded from gross income under IRC 132(d).

Reimbursements paid outside an accountable plan are includible in the employee's W-2 wages and are not deductible by the employee. Advisers should help clients document that their employer's plan satisfies all accountable plan requirements before treating reimbursements as excludable.

There is no miscellaneous itemized deduction workaround, no above-the-line alternative, and no Schedule A path for W-2 employees seeking a home office deduction after the OBBBA. Advising an employee to claim home office expenses on Schedule A or as an unreimbursed employee expense post-OBBBA is incorrect. The accountable plan route requires employer participation -- if the employer declines to adopt a plan, no deduction is available to the employee.

3. Home Office for Self-Employed and Schedule C Filers

The OBBBA employee prohibition does not apply to self-employed individuals and Schedule C filers. Independent contractors, sole proprietors, and partners in partnerships who use a portion of their home for business remain eligible for the home office deduction under IRC 280A(c)(1), provided they satisfy all three qualifying tests.

The Three-Part Test Under IRC 280A(c)(1)

All three elements are required. Satisfying two of the three is not sufficient.

Test 1: Exclusive Use

The specific area of the home must be used EXCLUSIVELY for business. No personal use of the same space is permitted -- not occasional, not incidental, not de minimis. A room that also serves as a guest bedroom, a desk area that also holds personal files, or a shared family computer all fail this test. The IRS and courts apply the exclusive use requirement strictly. Practitioners should advise clients to document the dedicated space with photographs, a floor plan showing the designated area, and square footage measurements.

Notable: the exclusive use requirement does not require a separate room, only a separately identifiable area used exclusively for business. However, a separately defined area is far easier to document and defend.

Test 2: Regular Use

The business area must be used on a regular, ongoing basis. Occasional or sporadic use does not qualify. There is no statutory bright-line frequency, but use must be systematic and consistent with the nature of the business. A taxpayer who works from home three to four days per week as a routine matter satisfies this requirement; one who uses a home workspace only when traveling clients visit does not.

Test 3: Qualifying Purpose

The home office must be used for one of three recognized qualifying purposes:

(a) Principal Place of Business (Soliman Test). Under Commissioner v. Soliman, 506 U.S. 168 (1993), and the post-Soliman statutory amendment, a home office is the taxpayer's principal place of business if: (i) it is used for administrative or management activities of the business; AND (ii) there is no other fixed location where the taxpayer performs those administrative or management functions. A physician who performs procedures at a hospital but handles all billing, record-keeping, and scheduling exclusively from a home office can qualify under this prong even though the hospital is where revenue is generated.

(b) Place to Meet or Deal with Clients, Customers, or Patients. The taxpayer must actually meet or deal with clients, customers, or patients in the home office in the normal course of business. Occasional client contact does not qualify; the meetings must be a normal, regular part of how the business operates.

(c) Separate Structure Not Attached to the Dwelling. A detached studio, workshop, or garage used exclusively and regularly for business qualifies even if it is not the principal place of business.

IRC 280A(c)(5): The Gross Income Limitation

The home office deduction is limited to the gross income derived from the business use of the home, reduced by the business portion of expenses that are deductible regardless of business use (such as mortgage interest and real estate taxes allocable to the business area). In other words:

• The home office deduction cannot exceed the net income produced by the associated business activity.
• The deduction cannot create a net loss from the business.
• Any disallowed amount carries forward to the next tax year and is subject to the same limitation in that year.

The carryforward is available under the regular method only. The simplified method does not permit a carryforward of unused deductions.

Computation Methods: Simplified vs. Regular

Simplified Method (Rev. Proc. 2013-13)

• Rate: $5 per square foot of the home office area.
• Cap: 300 square feet maximum, producing a maximum deduction of $1,500 per year.
• No depreciation deduction is allowed under the simplified method.
• No carryforward of unused deductions is available.
• No depreciation recapture exposure on home sale (because no depreciation is claimed).
• Reported directly on Schedule C; Form 8829 is not used.

Regular Method (Form 8829)

• Actual expenses (utilities, insurance, repairs, maintenance) are allocated between business and personal use based on the ratio of home office square footage to total home square footage.
• Depreciation on the business portion of the home is deductible under IRC 167 and 168, using the straight-line method over 39 years (residential property used for business).
• Creates IRC 1250 unrecaptured depreciation taxable at up to 25% upon sale of the home.
• The IRC 121 home sale exclusion does not shelter the depreciation recapture amount.
• Allows carryforward of unused deductions subject to the IRC 280A(c)(5) gross income limitation.

4. S-Corp Owners: OBBBA Employee Prohibition and the Structured Rent Alternative

Application of the OBBBA to S-Corp Shareholder-Employees

The OBBBA employee prohibition under Section 70110 applies to S-corp shareholder-employees. Because most S-corp shareholders who work in the business receive W-2 compensation from the corporation, they are "employees" for purposes of IRC 280A post-OBBBA. They cannot claim a home office deduction under IRC 280A(c)(1) for any tax year beginning after July 4, 2025, regardless of whether they satisfy the three-part qualifying test that continues to apply to self-employed individuals.

This is a meaningful change for shareholders who previously claimed home office deductions through their individual returns while also receiving S-corp W-2 wages.

Planning Alternative: Structured Rent Arrangement

The viable post-OBBBA alternative for S-corp owners is a properly structured lease between the shareholder and the S-corp for business use of the shareholder's home. This arrangement operates outside IRC 280A(c)(1) entirely and relies instead on IRC 162 (deductibility of ordinary and necessary business expenses at the corporate level) and IRC 280A(g) (Augusta Rule exclusion at the individual level).

The structure works as follows:

1. The shareholder (as landlord) and the S-corp (as tenant) execute a written lease agreement for use of the shareholder's home for identified business purposes.
2. The rent is set at fair market value, supported by comparable rental data for similar facilities in the area. The arrangement must reflect an arm's-length transaction.
3. The S-corp pays the shareholder rent and deducts it as a business expense under IRC 162, properly characterized as a meeting or facility cost.
4. If the total rental period is 14 days or fewer during the tax year, the shareholder excludes the rental income from gross income under IRC 280A(g).
5. If the total rental period exceeds 14 days, IRC 280A(g) does not apply; the rental income is includible in gross income and the vacation home allocation rules may apply depending on personal use.

This structure compensates the shareholder through an arm's-length commercial transaction rather than through employment. The rental income exclusion under IRC 280A(g) does not depend on the employee-vs.-self-employed distinction; it depends only on the number of days the dwelling unit is rented and the nature of the property.

Arm's-Length Requirements

The arrangement must be genuine. The IRS challenges structured rent arrangements where:

• The rent exceeds fair market value
• Business purpose documentation is absent or superficial
• The rental agreement is not executed before the rental period begins
• The arrangement lacks the economic substance of an independent commercial lease

A shareholder who sets rent at twice the market rate for comparable facilities, or who cannot produce documented business activities occurring during the rental days, faces recharacterization of the rent as a constructive distribution -- which is not deductible by the S-corp and is includible in the shareholder's gross income.

5. Augusta Rule Under IRC 280A(g)

Statutory Mechanics

IRC 280A(g) provides a categorical exclusion: if a taxpayer rents their dwelling unit (as defined in IRC 280A(f)(1)) for fewer than 15 days during the tax year, the rental income is excluded from gross income and no rental deductions are allowed for that rental activity. The provision is unconditional when the day count is 14 or fewer -- the income does not appear anywhere on the return, and no offsetting deductions are claimed against it.

The term "dwelling unit" under IRC 280A(f)(1) means a house, apartment, condominium, mobile home, boat, or similar property (and all structures or other property appurtenant to such dwelling unit) that provides basic living accommodations. It does not include commercial property, office buildings, or other non-residential property. The IRC 280A(g) exclusion is limited to dwelling units.

The 15-Day Cliff: Non-Linear Treatment

The IRC 280A(g) exclusion operates as a hard cliff, not a phase-out:

• 14 rental days or fewer: ALL rental income is excluded from gross income. No deductions for rental expenses are allowed.
• 15 rental days or more: The IRC 280A(g) exclusion is lost entirely. ALL rental income for the year (not just the income from days 15 onward) becomes includible in gross income. Rental expenses become deductible subject to the vacation home allocation rules.

There is no blended treatment. A taxpayer who rents for 15 days receives no benefit from the exclusion and must report the full year's rental income, offset by allocable expenses. This makes the day count a critical compliance point.

Planning Application: S-Corp and C-Corp Owners

The most common planning application of the Augusta Rule involves owners of closely-held S-corporations or C-corporations renting their personal residence to the corporation for up to 14 days per year for legitimate business purposes such as:

• Board of directors meetings
• Annual strategy or planning sessions
• Employee training or onboarding events
• Client appreciation or corporate hospitality events
• Executive retreats with documented business agendas

The economic benefit is asymmetric: the corporation deducts the rent at the applicable corporate (or pass-through) tax rate, while the individual homeowner excludes the rental income entirely from gross income. At a fair market rent of, for example, $1,500 per day for 14 days ($21,000), the corporation deducts $21,000 and the shareholder reports $0 of rental income.

Documentation Requirements

Practitioners advising clients on Augusta Rule arrangements should require the following documentation to be in place before or concurrent with each rental period:

1. A written rental agreement signed by both the homeowner and an authorized corporate officer, specifying the dates, daily or total rent, and the business purpose of each rental period.
2. Corporate minutes or board resolutions authorizing the rental and documenting business decisions made during the event.
3. An agenda or meeting materials demonstrating that substantive business activity occurred.
4. An attendance log identifying participants for each rental day.
5. Comparable rental rate data supporting the fair market value determination.
6. A running log of rental days for the tax year, updated in real time, confirming that the cumulative total does not exceed 14 days.

IRS Scrutiny and Limitations

The IRS is aware of the Augusta Rule planning technique, particularly in closely-held corporation contexts. Known IRS challenge points include:

• Rental rates that exceed what comparable facilities would command in the market
• Events that lack genuine business substance (social gatherings recharacterized as business meetings)
• Failure to execute written documentation before or contemporaneously with each rental event
• Day counts that suspiciously stop at exactly 14 every year, without variation
• Corporations with no employees other than the owner-shareholder, making "board meetings" or "training events" implausible on their face

The exclusion applies to the dwelling unit only. Attempting to apply IRC 280A(g) to a commercial property, a vacation rental that is not a dwelling unit, or an office rented separately from the residence is a misapplication of the statute.

6. Vacation Home Expense Allocation

The Personal Use Test Under IRC 280A(d)

A property is classified as a "vacation home" for IRC 280A purposes if the taxpayer uses it for personal purposes for more than the greater of:

• 14 days during the tax year, or
• 10% of the number of days during the tax year that the property was rented at fair market price.

Days that count as personal use include: days the taxpayer or a family member uses the unit, days the unit is rented to a related party at below fair market rent, and days the taxpayer uses the unit and also performs repair or maintenance work (unless the primary purpose of the stay is repair/maintenance, not recreation).

Days the property is idle (not rented and not used personally) are excluded from both the personal use count and the rental count for purposes of the 10% test, but they affect certain expense allocation calculations depending on the method used.

When the Personal Use Threshold Is Not Exceeded

If personal use does not exceed 14 days or 10% of rental days (whichever is greater), the property is treated as a rental property rather than a vacation home. Expenses, including depreciation, are deductible under the rental property rules of IRC 162 and IRC 167, subject to the passive activity loss limitations under IRC 469. This is the most favorable treatment for properties operated primarily as rentals with minimal personal use.

When the Personal Use Threshold Is Exceeded: Expense Allocation Methods

When the vacation home personal use threshold is exceeded, expenses must be allocated between the rental and personal use portions. Two competing allocation methods exist:

Bolton Method (Taxpayer-Favorable)

Upheld by the Ninth Circuit Court of Appeals in Bolton v. Commissioner, 694 F.2d 556 (9th Cir. 1982), this method allocates expenses in two tiers:

• Tier 1 (Mortgage interest and real estate taxes): Allocated using total days in the year (365 or 366) as the denominator. Because most days in the year are neither rental days nor personal use days, the personal-use portion of these expenses is large, preserving more of the mortgage interest and real estate taxes as a personal itemized deduction on Schedule A. The rental portion of these Tier 1 expenses is allocated to the rental and deducted against rental income, but it is relatively small.
• Tier 2 (Operating expenses: utilities, insurance, repairs, maintenance, depreciation): Allocated using rental days divided by (rental days plus personal use days), excluding idle days from the denominator. Because idle days are excluded, the rental percentage is higher under Tier 2, which increases the deductible rental portion of operating expenses.

The Bolton method is taxpayer-favorable because it maximizes the personal itemized deduction for mortgage interest and taxes while also maximizing the rental-portion deduction for operating expenses.

IRS Method

Under the IRS's preferred allocation method (reflected in IRS Publication 527), all expenses -- including mortgage interest and real estate taxes -- are allocated using the same ratio: rental days divided by total days used (rental plus personal, excluding idle days). Because idle days are excluded from the denominator, this ratio is higher than the Bolton Tier 1 ratio, which means more of the mortgage interest and real estate taxes are treated as rental expenses. The IRS method generally produces a larger allocation to the rental category for Tier 1 expenses, which can limit the rental deduction under the IRC 280A(c)(5) gross income cap and reduces the personal itemized deduction.

The IRS method frequently results in a smaller net rental deduction when the gross income cap applies, because more Tier 1 expenses are consumed against rental income, leaving less room for Tier 2 operating expenses and depreciation.

Rental Days Fewer than 15 (Augusta Rule Context)

If a vacation home is rented for fewer than 15 days during the tax year, IRC 280A(g) applies: the rental income is excluded and no rental deductions are allowed. In this scenario, the home is treated as a personal residence for deduction purposes, and only the normal personal itemized deductions (mortgage interest, real estate taxes) are available. The vacation home allocation rules do not apply.

Gross Income Limitation for Vacation Homes

Even when the vacation home rules apply, the gross income cap of IRC 280A(c)(5) limits the aggregate rental deduction to the rental income less the expenses deductible regardless of rental status (the rental portion of mortgage interest and taxes). This means vacation home rental expenses cannot create a net loss that reduces other income.

7. Quick-Reference Table: IRC 280A Scenarios

8. Frequently Asked Questions

• Q1: Can a W-2 employee deduct a home office after the OBBBA?
  No. OBBBA Section 70110 (Public Law 119-21, effective for tax years beginning after July 4, 2025) permanently eliminates the home office deduction for W-2 employees under IRC 280A. Employees cannot claim unreimbursed home office expenses through any individual return mechanism -- not as a miscellaneous itemized deduction, not above the line, and not under IRC 280A. The only viable post-OBBBA path for W-2 employees is an employer accountable plan: the employer reimburses documented home office expenses under IRC 162, and the employee excludes the reimbursement from gross income as a working condition fringe under IRC 132(d). This requires the employer to adopt and administer an accountable plan that meets the requirements of Treas. Reg. Section 1.62-2.
• Q2: What is the exclusive use test for the home office deduction?
  The exclusive use test under IRC 280A(c)(1) requires that the specific area designated as a home office be used ONLY for business -- no personal use of the same space, not occasionally, not incidentally, and not de minimis. A dedicated room that also serves as a guest bedroom fails. A desk area that holds personal files fails. A shared family computer in the workspace fails. The IRS and Tax Court apply this test with strict literalism. To document compliance, practitioners should advise clients to photograph the space, prepare or commission a labeled floor plan showing the designated area, record the square footage, and remove any personal-use items from the area before the tax year in question.
• Q3: What is the Augusta Rule under IRC 280A(g)?
  IRC 280A(g) -- colloquially called the Augusta Rule after the Masters Tournament practice of Augusta-area homeowners renting to tournament visitors -- provides that if a taxpayer rents their dwelling unit (as defined in IRC 280A(f)(1)) for fewer than 15 days during the tax year, the rental income is excluded from gross income entirely. No rental deductions are allowed to offset the excluded income. The exclusion applies to dwelling units only, not to commercial property. It is unconditional when the rental period is 14 days or fewer: the income does not appear on the tax return and no reporting is required. The exclusion is lost entirely if the rental period reaches 15 days.
• Q4: How many days can I rent my home to my S-corp under the Augusta Rule?
  Up to 14 days per tax year. The IRC 280A(g) exclusion covers rental income from dwelling units rented for fewer than 15 days in a tax year. A shareholder may rent their personal residence to the S-corp for up to 14 days at fair market rent; the S-corp deducts the rent as an ordinary and necessary business expense under IRC 162, and the shareholder excludes the rental income from gross income. Renting for 15 or more days eliminates the exclusion entirely for the full year's rental income -- not just the income from the 15th day forward. The rental agreement must be in writing, rent must be at fair market value supported by comparable data, and the S-corp must document the specific business purpose, attendees, and agenda for each rental day. Consult independent counsel before implementing this arrangement, as the IRS applies heightened scrutiny to closely-held corporation rental arrangements.
• Q5: What is the difference between the Bolton method and the IRS method for vacation homes?
  Both methods allocate vacation home expenses between the rental and personal use portions, but they treat mortgage interest and real estate taxes differently, producing different tax outcomes. Under the Bolton method (Ninth Circuit, 1982), mortgage interest and real estate taxes are allocated using total days in the year (365 or 366) as the denominator. Because idle days are included, most of these expenses fall into the personal-use column and remain available as personal itemized deductions. Operating expenses (utilities, maintenance, depreciation) are allocated using rental days divided by rental-plus-personal days, excluding idle days, which increases the rental fraction. Under the IRS method, all expenses -- including mortgage interest and taxes -- are allocated using rental days divided by total days used (rental plus personal, excluding idle). This method pushes more mortgage interest and real estate taxes into the rental category. Because the gross income cap under IRC 280A(c)(5) limits total rental deductions to net rental income, the IRS method often produces a smaller net deductible loss for the rental portion. The Bolton method is taxpayer-favorable; the IRS method is preferred by the agency but upheld less favorably by courts.
• Q6: What happens if my home office deduction exceeds my business income?
  Under IRC 280A(c)(5), the home office deduction is capped at the gross income derived from the business activity conducted in the home office, reduced by the otherwise-deductible business portion of mortgage interest and real estate taxes. The home office deduction cannot create a net loss from the business. Any amount disallowed by this gross income limitation carries forward to the next tax year and is subject to the same limitation in that year. The carryforward is available indefinitely under the regular method. It is NOT available under the simplified method -- if the deduction is limited under the simplified method, the excess is simply lost for that year with no carryforward.
• Q7: Does claiming home office depreciation affect the sale of my home?
  Yes, and this is a significant planning consideration. When a taxpayer claims depreciation on the business portion of a home under the regular home office method (Form 8829), the depreciation claimed creates IRC 1250 unrecaptured depreciation. When the home is later sold, this recapture amount is taxed at a maximum rate of 25%. Critically, the IRC 121 home sale exclusion (up to $250,000 for single filers, $500,000 for married filing jointly) does NOT shelter the depreciation recapture. The IRC 121 exclusion applies to appreciation in the home's value, not to the depreciation previously deducted and recaptured. A homeowner who claimed $30,000 in depreciation over several years will recognize $30,000 of recapture income at up to 25% even if the rest of the gain is excluded under IRC 121. This exposure does not arise under the simplified method, which allows no depreciation deduction.
• Q8: What records do I need to support the Augusta Rule arrangement?
  To support an IRC 280A(g) arrangement under IRS audit, maintain all of the following: (1) a written rental agreement between the homeowner and the corporation, signed before or at the start of each rental period, specifying dates, rental rate, and business purpose; (2) documentation of fair market rent supported by comparable rental data for similar event or meeting facilities in the area; (3) corporate minutes or board resolutions authorizing each rental and identifying the business decisions made; (4) an agenda and any meeting materials for each event; (5) an attendance log identifying every participant for each rental day; and (6) a cumulative rental day log for the tax year confirming that total rental days remain at 14 or fewer. Do not estimate the day count. Record each date individually at the time it occurs. Retroactive documentation is a significant red flag under audit. Consult independent counsel if the arrangement involves significant dollar amounts or audit-risk factors such as single-shareholder corporations or above-market rent.

9. Related Guides

• Home Office Deduction for Tax Preparers: Schedule C and Form 8829 -- Operational Guide
• IRC 469: Passive Activity Loss Rules and the Real Estate Professional Election -- Practitioner Guide
• IRC 199A QBI Deduction and OBBBA Updates -- Practitioner Guide
• IRC 183: Hobby Loss Rules, Profit Presumption, and the Nine-Factor Test -- Practitioner Guide
• IRC 179: Section 179 Expensing Election and Form 4562 -- Practitioner Guide