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It can be confusing to determine your principal place of business when you operate in different locations. 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 services companies like Uber and TaskRabbit, more and more taxpayers are faced with the challenge of trying to figure this out.
Why is your principal place of business important? Properly defining your principal place of business affects:
Let’s figure out your principal place of business.
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 you operate three locations but do most of the administrative and management work such as bookkeeping, scheduling, and management activities from an office in your home that is used exclusively for that purpose, you can deduct some of the costs associated with keeping up your home, 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. 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, like 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 best resource you can have as a business owner is a qualified tax professional. Working with a CPA, enrolled agent or other qualified tax pro will help you navigate the federal and state tax laws and make sure that you stay compliant. Another place to look is this explainer from the IRS: IRS Publication 587.