An IRS principal business code is a six-digit number that identifies the main type of products or associated services that a company sells. To ease IRS administration, this code categorizes sole proprietorships or independent contractor employment based on an activity in which they are substantially involved. In other words, it is decided by the business activity that brings in the greatest money for it.
The IRS employs a business code based on the North American Industry Classification System (NAICS), which is updated every five years and was recently updated in 2017. Business codes are also known as “Professional Activity Code” or “Primary Business Code.”
What Is the Naics Structure?
NAICS is a two- to six-digit hierarchical categorization system with five levels of detail. Each number in the code represents a progressively narrower category, and the more digits in the code represent greater categorization detail. The first two digits represent the economic sector, the third digit represents the subsector, the fourth digit represents the industrial group, the fifth digit represents the NAICS industry, and the sixth digit represents the national industry.
The 5-digit NAICS code is the level at which most NAICS sectors’ codes and meanings are comparable throughout the three nations that participate in NAICS (the United States, Canada, and Mexico). The 6-digit level provides for country-specific detail for the United States, Canada, and Mexico. Six numbers constitute a full and valid NAICS code.
What Is the Purpose of a Principal Business Code?
In most situations, the IRS and the US Census Bureau will utilize your primary company code for statistical purposes. They gather, analyze, and publish data by comparing year-to-year revenue and other important figures reported by people. Furthermore, the Small Business Administration differentiates small enterprises from medium and big corporations by using the principal business code of your business’s industry and the size of your business.
When Are These Codes Required?
You may be aware that while preparing your income tax return for any sort of business, you must provide the code for principal business activity (e.g. corporation, partnership, or sole proprietors). Essentially, you must input this code on all business tax returns. As previously said, if you have many income streams in your firm, you must input the one that generates the most money. The IRS defines the “principal business activity” as the one that generates the greatest percentage of “total receipts.”
Several other U.S. government forms may require a primary business code. The Small Business Administration is one example. For businesses that want to participate in an SBA loan guarantee program, this agency also requires NAICS codes. In the other scenario, if you wish to be a federal government contractor, you must provide a code in your application.
How To Identify Your Principal Business Code?
The North American Industry Classification System utilizes the first two-digit code to designate broad groups such as Agriculture, Forestry, Fishing, and Hunting (11) or Accommodation, Food Services, and Drinking Places (72). These categories are presented numerically on the NAICS website. You must pick the finest description for your company under each category. For example, if you run a sandwich shop, the first category you would select is Accommodation, Food Services, & Drinking Places. Then you would proceed to “Sandwich shops, limited-service,” which has the code 722513.
Can I Have My Business’ Principal Business Code Changed?
There is no “official” way to modify a company’s NAICS code, and no central registry reflects the “official” NAICS classification for businesses. Various federal government departments maintain their own company directories and give categorization codes depending on their own requirements. In most cases, the categorization codes are generated from information supplied by the firm on surveys, tax forms, or administrative documents.
Do Principal Business Codes Change Over Time?
NAICS will be reviewed every five years for potential revisions for the classification system to stay up with the changing economy.
A principal business code is a six-digit number that identifies the primary type of goods or services that you sell or provide. The codes are based on the NAICS, which is updated every five years and was most recently revised in 2017. Choosing the right principal business code will assist the IRS, U.S. Census Bureau, and other federal government agencies in categorizing sectors and businesses and effectively analyzing the U.S. economy.