A principal business code is an indispensable part of conducting business in the United States. This six-digit number is a means of categorizing a company’s main product or service, and it plays an important role in filing federal taxes with the Internal Revenue Service (IRS), applying for SBA loans, and other government identification uses.
By having a business code assigned to them, companies are able to properly classify their operations in order to receive any tax deductions or credits that could be available to them. Potential customers can also use these codes to determine what type of products or services a company provides.
If you still have questions about your business’s activity code, or are wondering about the importance of these codes, we have composed this quick and easy guide to help you.
What is a Business Activity Code?
First things first, what is a business activity code? The North American Industry Classification System (NAICS) is the official code system used by the IRS to classify businesses according to their primary economic activity. NAICS is updated every five years and was last revised in 2017, providing an up-to-date system for US, Canadian, and Mexican governments’ use.
This six-digit code provides a systematic way of categorizing businesses into distinct types and categories, making it easier for tax administrators to identify and assess businesses accurately Each code has a corresponding description that defines the activity, such as ‘Manufacturing,’ ‘Retail Trade,’ and ‘Construction.’
Many different codes can be assigned to a business based on its highest relative share of production costs and/or capital investment or revenue generated. However, in actual practice, the principal business code for a company is most often determined by its revenue or employment.
Your business activity code helps the IRS keep an accurate record of companies’ financial activities, helping them monitor companies’ compliance with tax laws and regulations. The codes are an important tool for organizing businesses according to the activities they are engaged in.
Why Do You Need a Business Activity Code?
A business activity code helps the IRS conduct audits more efficiently by providing groups of businesses with similar operations and characteristics which can be compared. This list of codes simplifies the process of assessing taxes owed by different types of enterprises, allowing officials to identify their activities and accurately determine the necessary fees quickly
How to Find Your Business Activity Code
Finding the correct business code for taxes is a simple process that can be completed by following a few steps. First, the government agencies such as the Social Security Administration, Census Bureau, and Internal Revenue Service assign their own business activity codes based on any information they already have from documents filed by your company.
This means that although there may be discrepancies between different agency documents, your unique numerical sequence with the IRS will remain consistent. In order to find your specific business code for taxes, you will need to provide them with additional documentation related to your company.
Once these documents have been submitted, the IRS will generate an individualized numerical code tailored to your company’s information. Finally, this code can be used when filing taxes or any other document that requires its use.
By following these steps carefully and providing the necessary information to the IRS, you can easily acquire the proper business code needed for tax filing. Or, to save yourself the hassle, you can seek out the assistance of a tax professional.
Tax professionals and the right tax preparation software can be invaluable assets for a business owner. Trying to determine the business activity code on your own can be a difficult and arduous task due to the broad range of rules associated with them.
Thankfully, our experienced tax professionals at UltimateTax are well-versed in these regulations and have the expertise necessary to figure out which one applies to you quickly and efficiently. This not only saves you time, but also helps prevent costly mistakes that could lead to fines or other penalties.
How to Choose the Correct Code
When attempting to classify a business, it is important to first identify the two-digit code that best reflects its primary purpose. This can easily be done by browsing the categories, ranging from Agriculture, Forestry, Fishing, and Hunting (11) to Manufacturing (31-33).
After selecting the most appropriate category, further research should be conducted in order to determine the six-digit code that best describes a business’s operations. Depending on where you look for this information, such as in the Schedule C instructions or on the NAICS website, the codes may be listed alphabetically or in numerical order.
For example, if a coffee shop is looking for its correct NAICS code, they would first go to Accommodation, Food Services & Drinking Places and then look for “Snack & Non-alcoholic beverage bars,” which has the code 722515.
With this knowledge in hand, businesses can confidently ensure that their classification accurately represents their industry.
Common Business Activity Codes for Different Industries
By using these codes, businesses can accurately report their activities, helping them comply with regulatory requirements and make better-informed decisions about their operations. Below, we will take a look at some more specific business codes for various industries.
Examples of Common Business Activity Codes for Service-Based Businesses
Educational services are one of the most important business codes. These services involve schools, colleges, and universities, providing students with the knowledge and skills they need to grow and succeed.
Finance and insurance businesses have a variety of codes including:
- Credit Intermediation & Related Activities
- Insurance Agents, Brokers, & Related Activities
- Securities, Commodity Contracts, & Related Activities.
These businesses provide people with financial security and guidance in managing their money wisely. Health Care & Social Assistance also has a range of codes that include:
- Ambulatory Health Care Services
- Hospitals, Nursing & Residential Care Facilities
- Social Assistance
Examples of Common Business Activity Codes for Manufacturing Businesses
Businesses that manufacture products typically use a set range of business activity codes to identify their activities. Examples include:
- Product Manufacturing, which is the production of goods such as electronics, clothes, and toys
- Chemical Manufacturing for chemicals like pharmaceuticals and paint
- Food Manufacturing for processed food items like canned vegetables or cereal
- Leather & Allied Product Manufacturing
- Nonmetallic Mineral Product Manufacturing which produces things such as glass or cement
Businesses that manufacture products are involved in a wide range of activities that span multiple industries. Manufacturing (31-33) involves producing goods for sale, either on its own or as part of the production process for another company.
Examples of Common Business Activity Codes for Retail Businesses
Retail businesses are a vital part of the economy and include many different types of activities. According to the Business Activity Codes, retail businesses encompass a variety of establishments from clothing and accessories stores to motor vehicle and parts dealers.
These businesses include the following:
- Building Material & Garden Equip. & Supplies Dealers
- Clothing & Clothing Accessories Stores
- Electronics & Appliance Stores
- Food & Beverage Stores
- Furniture & Home Furnishings Stores
- Gasoline Stations
- General Merchandise Stores
- Health & Personal Care Stores
- Miscellaneous Store Retailers
- Motor Vehicle & Parts Dealers
- Sporting Goods, Hobby, Book, & Music Stores
- Nonstore Retailers
Retail Trade, codes 44 to 45, covers businesses that sell goods directly to consumers, often through brick and mortar stores, online shops, or other retail outlets. They purchase their goods from manufacturers or wholesalers and then resell them at a markup.
When completing your business’s tax return, it is important to accurately provide the principal business code that corresponds to your primary revenue-generating activities. The code and description give the IRS a better understanding of the primary activities or services your business provides and prevents them from making common mistakes.
By clearly describing your primary business activities, you’re helping the IRS get an accurate picture of your operations so they can properly assess your taxes. For step-by-step assistance, contacting UltimateTax will make tax season much easier.
At UltimateTax we can support you with any tax questions you may have, and walk you through the tax process if needed.