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:
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 14-day free trial today.
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.
The IRS has two tests to see if a taxpayer's home office is considered a principal place of 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 14-day free trial today.
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.
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.
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 14-day free trial here.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?