Julia the Plumber has a home-based business. She has a separate office at home where she does bookkeeping, receives calls from customers and vendors, and where she does other work related to her business. She also writes bills and does some administrative work in her car at the homes of customers.
How about Roberto, who works as a salesperson, traveling from his home office to client offices? He has a small office at his employer's site, but he rarely uses it. The employer requires him to maintain a home office in his territory to get to client sites more quickly. What is the principal place of business for Julia and Roberto?
Understanding the concept of "principal place of business" is an important issue, because you can only deduct expenses for business use of your home if your home is your principal place of business.
If Your Home Is Your Only Business Location
If you work from home running your business (not as an employee of someone else), and you have no other business location, your home is your principal place of business.
If You Have Another Location
If you have several locations from which you do business, you cannot deduct the expenses for the use of your home unless it is your principal place of business. To make this determination, the IRS looks at:
- The relative importance of the activities performed at each place where you conduct business, and
- The amount of time spent at each place where you conduct business.
Your home office can qualify as your principal place of business only if you meet the following IRS requirements:
- You use it exclusively and regularly for administrative or management activities of your trade or business. It means that the location at your home where you run your business is used exclusively and regularly for this purpose.
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. You may, however, do some administrative or management activities outside your home (in your car, for example), or someone else may do administrative work for you outside your home (a bookkeeper, for example).
If You Are an Employee
The principal place of business for an employee is a little less clear than for a solo business owner. To qualify as the employee's principal place of business, the home office:
- Must be used for the convenience of the employer, not the employee (not just "helpful"), and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
The Examples Continued
Julia's does her plumbing work at customer locations, and she has a bookkeeper, but her home office qualifies as her principal place of business, because
- (a) it is used regularly and exclusively for business purposes, and
- (b) she has no other place where she does most of her administrative and managerial work.
She can take the appropriate deductions for her home office. Roberto's home office is required by his company for its convenience and to save money so that it can be classified as his principal place of business, and his home office expenses are deductible.
An IRS Flow Chart to Help ... Sort Of
The IRS has a handy little flowchart to help you figure out whether your home business qualifies for tax deductions. Unfortunately, the flowchart doesn't help when you get down to the question, "Is it [your home] your principal place of business?" Unless you know what the "principal place of business" means, you can't use the flowchart.