DEFINITION of 'Principal Place Of Business'

The principal place of business is the primary location where a taxpayer's business is performed. This is generally where the business's books and records are kept and is often where the head of the firm – or at least upper management – is located. Corporations are usually required to report their principal place of business to the Secretary of State.

BREAKING DOWN 'Principal Place Of Business'

Taxpayers who work from home must be able to prove that their residence is their principal place of business. Two criteria must be met in order for this to be true:

•The designated place of business within the home must be used exclusively and regularly for the performance and administration of the taxpayer's business.
•There can be no other location where the taxpayer substantially performs these operations.

For solo practitioners who use part of their homes as their principal place of business, certain tax deductions are permitted. This can include portions of rent or mortgage payments, and a percentage of utility costs that reflects the scope of the area dedicated to business usage.

The principal place of business plays a role not only in tax purposes but in litigation. Where a company is based can affect legal jurisdiction and determine which court will hear legal matters involving the company.

What Principal Place of Business Means to Courts

The United States Supreme Court has defined the principal place of business as the place where a corporation's officers direct, control, and coordinate the company's activities. This is also described as the company's nerve center, where the primary functions and decision making of the enterprise occur. Under normal circumstances, this is also the location where the headquarters of a company is situated. However, this might not be the case if the headquarters is largely an office just for board meetings for officers and directors of the company while a remote location serves as the epicenter for control, direction, and coordination of the company. Dependent on the type of business, transactions and operations that are integral to the company may be conducted at the principal place of business. For example, a single-store retailer's principal place of business would be the store where they sell products, train and manage staff, maintain inventory, and run an office to oversee the operation. A dentist could list their office where they perform exams and treat patients as their principal place of business. The garage where a mechanic services vehicles and maintains tools and parts also qualifies for this designation.

 

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