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A principal place of business is your company’s primary location. It is often where your books are kept and the location where your leadership team is based. The IRS allows you to take certain deductions, depending on the location of your principal place of business.
When you operate in different locations, it can be confusing to determine your principal place of business. Some businesses have multiple store locations in different cities or states, and some smaller businesses operate out of a home or spend most of their time on the road visiting customers.
In fact, with the recent surge in individuals working for on-demand service companies like Uber and TaskRabbit, more and more taxpayers are faced with the challenge of trying to figure out where exactly is their principal place of business.
But knowing your principal place of business has important accounting and tax implications. Let’s take a closer look at the benefits of knowing your principal place of business, and how to determine yours.
Why is your principal place of business important? Properly defining your principal place of business affects the following:
Let’s take a closer look at how your principal place of business impacts your deductions and taxes.
You can deduct the expenses you incur to maintain the locations of your business, whether you rent or own the property. If you operate three retail stores for your business, for example, you can deduct the costs to maintain all three stores. But if you also work out of your home, you might be able to deduct costs to maintain your home if you can establish that it is your principal place of business.
The IRS lets you deduct certain expenses if you use your home to conduct business and you meet certain tests. According to IRS Publication 587, to qualify for this deduction you must consider:
If your business operates three locations but does most of the administrative and management work such as bookkeeping, scheduling, and management activities from an office in your home, you might be able to deduct some of your taxes. First, it’s important to understand whether the office in your home is used exclusively for business purposes. If so, you can deduct some of the costs associated with keeping up your house, such as mortgage interest, insurance, real estate taxes, repairs, and utilities.
The key to determining the principal place of business is where most of the administrative or management activities are performed. Generally, if you have no other fixed location where you conduct substantial administrative or management activities, you can deduct your home office.
The IRS has special rules for those who conduct business on the road or are away from their homes for a significant amount of time. For example, if you conduct administrative or management activities from a hotel room or from your car, this won’t necessarily disqualify you from being able to take the deduction. Neither will hiring an outside company, such as a bookkeeper, to perform these activities outside of your home.
There are other tests and requirements associated with this deduction that you’ll want to talk over with your qualified tax professional when considering whether you’re eligible to take the deduction.
Other deductions that may be affected by your principal place of business are travel expenses. There are special rules regarding the distance between places that you work and your “tax home” that can affect whether some costs are deductible.
It’s also important to establish your principal place of business in order to determine which state and local authorities require you to pay tax and the types of taxes you’re required to pay. Many states require that you collect and remit sales tax and pay income tax if you conduct business in any capacity within their borders. But other states don’t have the same requirement if you spend an insignificant amount of time there or your income from the state is less than a certain amount.
You need to know your principal place of business in order to calculate the amount of income tax to pay to each state where you file. Typically, you’re required to report all of your income on the tax return for your home state (the state you have determined as your principal place of business), but you can take a credit for any taxes paid to other states, which reduces the tax you owe. Make sure to check with each state to determine which taxes you need to pay.
Where your employees work can also affect the types of taxes you pay. If you hire remote employees and they work in different states, you need to register as an employer in those states and remit payroll taxes. And if you provide services in surrounding areas outside of your principal place of business, you need to be aware of the laws and obligations that you might have.
The United States Supreme Court defines principal place of business as the following:
“‘Principal place of business’ is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).”
This is similar to the IRS’s definition of a principal place of business requiring exclusive and regular use. However, know that if your business ever needs to go to court, your principal place of business will be determined in accordance with the Supreme Court’s definition.
There are a couple of situations where your principal place of business might not be so obvious. Let’s take a closer look at some of those instances.
A virtual office is a service that allows a workforce to operate remotely by providing a range of necessary business functions through the internet, such as a mailing address, phone number, and office space which you can rent on an as-needed basis. Because virtual offices provide your business with a physical address, it is fair to wonder if that means it can be used as the principal place of business.
However, given that a business does not typically carry out business activities via the location provided by the virtual office, it should follow that a virtual office is not sufficient as a principal place of business. Those who operate out of a virtual office are better off listing their home address as their principal place of business.
A registered office is a physical location in which all of a corporation’s legal documents are stored and the location where any process of service is served (i.e. court summons). The law requires that the registered office be located in the same state in which the business is incorporated, and have a registered agent present during normal business hours to receive paperwork on behalf of the business.
The registered office can also be the principal place of business, although it doesn’t need to be. An example of a registered office that is also a principal place of business is a storefront where legal documents are kept, managers operate, and business is carried out on a daily basis.
The best resource you can have as a business owner trying to determine your principal place of business and how it affects the taxes you owe is a qualified tax professional. Working with a CPA, enrolled agent, or another qualified tax pro will help you navigate the federal and state tax laws and make sure that you stay compliant.
Understanding your principal place of business can help you identify tax opportunities and stay compliant with the law. There are pros and cons to different types of principal places of business, so be sure to consult with a tax professional before creating yours. With your principal place of business sorted, you can focus on larger matters related to the success of your business.