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When is your home office a principal place of business?

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Updated on:
December 11, 2022
December 11, 2022
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The IRS has a nice tax break for self-employed folks who use a section of their home as office space for business. The home office deduction allows you to be reimbursed for home office expenses or the designated area where you conduct business.

There are two IRS-approved methods for claiming the home office deduction: the home office simplified method and Actual Expenses way.

Regardless of what method you select, you would first need to review if you qualify for this deduction. You'd need to prove two things:

  1. Regular and exclusive use.
  2. Principal place of business.

In this article, we'll go over the principal place of business requirements. The principal place of business is important to know because a business owner, depending on where their major place of business is located, will allow them to take specific deductions.

Note: if you need help tracking your home office deduction expenses, then try Bonsai Tax. Our app will scan your bank or credit card records to organize your business receipts and maximize your deductions. In fact, users typically save $5,600 with our software's services. Try a 7-day free trial today.

What A Principal Place Of Business Important For Your Business

Understanding when a "principal place of business" is important for tax and legal litigation. The legal jurisdiction in which your firm is located, as well as the court that will hear legal cases affecting your organization.

Depending on where your principal place of business is, will determine State and employee income taxes you'll need to pay. Also, contingent on where you operate in your principal office you may be able to take tax deductions for certain expenses.

For example, if a company's directors operate the company's business activities in California, then its principal place of business is in California. These business activities in California, regardless of the degree of activity, would make California the company's principal place of business. According to the IRS, a company can only have one principal place of business. This does not prevent a corporation from being a citizen of multiple states. Usually, when a corporation is incorporated in a different state than where the headquarters or actual center of direction where they conduct business is located, it is a citizen of both States.

A party does not need to locate a corporation's principal place of business in order to establish diversity jurisdiction.

For tax reasons, it’s important to understand whether the office in your home is used regularly and exclusively for business purposes. First, you'll look at where most of the administrative or management activities are performed. If you have no other fixed location or physical address where you conduct substantial administrative or management activities, you can deduct your home office.

A Breakdown Of A "Business Principal Place"

The IRS has two tests to see if a taxpayer's home office is considered a principal place of business.

  1. The relative importance of the activities carried out in the area.
  2. The amount of time spent at each place where you conduct or operate your business

It should be noted, if you don't have another established site where you conduct business, your home office becomes your primary location.

There are special rules for taxpayers that work from home as they must prove their residence is in fact their principal place of business.

If you can show the IRS you conduct regular work, administrative, or management activities somewhere in your home as your principal place of business, you may qualify for the deduction.

If so, you can deduct some of the costs associated with keeping up your houses, such as mortgage interest, repairs, insurance, utilities, and real estate taxes.

For example, let's say you meet with clients at your home in a designated office but you also hold meetings in a different office building. You could deduct a portion of your costs you use exclusively and regularly for business.

This includes a garage, free standing space, studio, barn. If you use the space regularly and exclusively for business, the area does not have to be your principal place of business and it would still qualify as a deduction.

Remember, a relative importance of the activities performed at each business location and the time spent at each place is important to prove a principal place of business.

Typically, the percentage of your house used for business reasons determines how much you can deduct for a home office. So, if you run your business out of a complete room or a portion of a room, you'll need to figure out what percentage of your home is dedicated to your business. Based on where your the principal place of business is based, you'll qualify for certain deductions.

Be careful, a lot of folks took advantage of this tax write-off when it was first rolled out by the IRS. An IRS audit for claiming the home office deduction scared many business owners from writing off their home office. You just need to make sure you meet the requirements so you don't get in trouble.

For a full list of home office deduction requirements, refer to IRS Publication 587.

Note: If you need help recording all of your actual expenses and other tax deductions, try Bonsai Tax. Our app can scan your bank/credit card receipts and maximize your tax write-offs with the IRS. Users typically save $5,600 from their tax bill by trying our app. Claim your 7-day free trial today.

Corporation's Registered Office For Legal Documents

If a business registered an office with a State, this is normally is a physical office in which all of the corporation's legal documents will be stored in the event a lawsuit requires them. So, a registered agent present during normal business hours to receive paperwork for legal matters and a address or location is a must.

Supreme Court Test For Principal Place Of Business

The U.S. Supreme Court has a "nerve center test" to determine a business's principal place of business. If a corporation's officers direct and control the company activities, then the company's location is the principal place of business. Usually, the physical location of the company is the headquarters where important activities are performed as well as most time is spent. In other words, a corporation's officers direct, control and coordinate business activities like board meetings is the company's "nerve center" and thus the principal place of business.

Speak To A Law Firm Or Accountant

Tax laws are always changing. We recommend you speak with a tax professional or attorney to help you with determining your principal place of business and tax write-offs.

If you need help tracking and managing your tax deductions automatically, try Bonsai Tax. Our app will discover potential tax write-offs from your bank/credit card receipts and automatically record them. You can print out the records if you get audited. Plus, users save an average of $5,600 from their tax bill with our app. Try a 7-day free trial here.

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