Principal Place of Business: Everything You Need to Know
For a sole proprietor or a one location company, your principal place of business is your home, shop, office or wherever you primarily do business. However, large companies and corporations often have several locations spread out across the country, or even around the world.4 min read
2. Why is the Principal Place of Business important?
3. Tax Benefits and the Principal Place of Business
4. For the IRS, two main conditions must be met:
Updated October 29, 2020:
What is Your Principal Place of Business?
This question is not as simple as it sounds. For a sole proprietor or a one-location company, the answer is straightforward – your principal place of business is your home, shop, office, or wherever you primarily do business. But large companies and corporations often have several locations spread out across the country, or even around the world. In these situations, the company headquarters is usually the principal place of business. This is not necessarily the same state as the state of incorporation.
The supreme court finally ruled that the “nerve center” of the company is the principal place of business. The nerve center test refers to the single place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice, it is usually where the headquarters are, as long as the headquarters are the center of direction, control, and coordination. It has to be more than merely an office where the leaders of each location meet, such as where board members hold their meetings. To be considered the principal place of business, it must actually be the place that is in control of the corporation.
Why is the Principal Place of Business important?
The principal place of business is important both for the IRS and for purposes of litigation. If a plaintiff lives in a different state than a defendant which happens to be a business, and the plaintiff sues the defendant, then there is what is called ‘diversity of citizenship’ and that could affect which court the lawsuit can be filed into. If there is a diversity of citizenship, and the amount in dispute is over a certain number, then the case might be appropriately filed in Federal court, as opposed to state court.
Even with the Supreme Court clarifying the definition of the principal place of business, it may not always be so simple as described above. There are still times when an officer could wear multiple hats and serve both a subsidiary corporation and parent corporation at the same time, and therefore controls and coordinates corporate activities from multiple states, which could confuse where the principal place of business actually is.
Tax Benefits and the Principal Place of Business
The IRS is very interested in what you consider your principal place of business because this is usually where the books and records are kept. It also allows many business owners to take certain deductions, depending on where their principal place of business is located. Corporations are usually required to report their principal place of business to the Secretary of State. For a home business, things get a bit trickier.
If you work at home or use your home as a base of operations for contracting businesses like landscaping or roofing, you must be able to prove that your home is your principal place of business. If you have multiple places of business, in order to determine the principal place, the IRS will look at the relative importance of the activities performed at each place, and the amount of time spent at each place where one conducts business.
For the IRS, two main conditions must be met:
The section of your home that you designate as your place of business must be used only for business purposes and you must use it regularly. The business you do in your office could include bookkeeping, making phone calls, or any other office duties needed to run your operation.
There is no other location where you perform these tasks. This doesn't mean you can't do your books while relaxing on the sofa, just that you can't claim the sofa as part of your business for tax purposes.
If you do most of your work away from your home or office (for example, you're a plumber, roofer, or cab driver), your principal place of business is still where you keep your books. Even though the majority of your work is not done there, the physical address you use is your place of business. There are other ways to meet the home as the principal place of business, even if you do not earn most of your income at home. If you regularly use part of your home to meet with clients or customers, this may be sufficient, and it is even better if you do your bookkeeping or other paperwork there. However, if you use the same space for personal reasons, such as watching TV, chances are you’ll lose the deduction. If you do meet clients at your home, keep an appointment book that records the name, date, and time of each person you meet at your home, in the event the IRS gets suspicious.
You can also deduct expenses if you use a separate free-standing structure, like a backyard shed or garage. This doesn’t have to be the principal place of business to get the deduction, as long as the structure is used only for your business. So you can’t store your lawnmower in the same place you run your business.
For a solo business owner, it is easier to determine what the principal place of business is than for an employee of a business. A home office will qualify as an employee’s principal place of business if it is used for the convenience of the employer, rather than the employee, and the employee cannot rent a part of his or her home to the employer and use that rented portion to perform services as an employee of that employer.
The great thing about using a home office as a principal place of business is that these individuals can deduct a portion of their mortgage, utilities, property taxes, and other related expenses. It is worth considering dedicating a portion of your home as a home office to reap the benefits of this deductible, particularly if you are a business owner.
If you need additional information about your principal place of business or other areas of tax law, you can post your legal need on the UpCounsel marketplace can help you find an attorney who can help.