When you start a business, you need several identifiers that the IRS uses to collect and examine your primary business activities and revenue streams.
Among these identifiers for business are principal business codes, which the Internal Revenue Service uses to analyze your business tax returns and financial information.
This guide describes a principal business code for taxes and why you need one to file correctly on your next business tax return. So let’s dive in.
What Is a Principal Business Code?
The principal business code is a six-digit number that the Internal Revenue Service usually assigns to your business based on the revenue and activities you report in your tax filings.
According to the IRS, the principal business code for a company is determined by the business activity that generates the most revenue. According to the United States Census Bureau, it should be determined ideally by the business’s highest relative share of production costs and/or capital investment. Still, in practice, it is determined by revenue or employment.
The codes are based on the North American Industry Classification System (NAICS), which was developed collaboratively by the governments of the United States, Canada, and Mexico. It is updated every five years; the most recent update was in 2017.
The Purposes of a Principal Business Code
The IRS and the Census Bureau use your principal business code for statistical purposes and to compare year-to-year revenue and other figures you report as part of your general commercial regulatory compliance.
When you expand your business, you will have a principal business code that the United States Census Bureau will use to collect, analyze, and publish statistics about the American economy. Furthermore, the Small Business Administration associates the primary business code of your company’s industry with its size. This distinguishes small and medium-sized businesses from large corporations.
Furthermore, these business activity codes are used by businesses to file their tax returns with the IRS and apply for loans with the US Small Business Administration. Other types of principal business codes are also created and used.
Sometimes the principal business code for taxes is called the professional activity code.
How Does a Principal Business Code Work?
The instructions for IRS Schedule C, which is used to report a profit or loss from a sole proprietorship or single-member LLC, and the instructions for other business tax forms include a schedule of the principal business codes (PBCs). You can also use the NAICS Association’s website to search for the correct code.
Agriculture, Forestry, Fishing, and Hunting and Manufacturing are the first two digits of a PBC (31-33). These categories are listed alphabetically in the Schedule C instructions. They are listed in numerical order on the NAICS website.
Find the best description for your company within a category. For example, if you own a coffee shop, you would first go to the Accommodation, Food Services, and Entertainment sections. The best description for a coffee shop is probably “Snack & non-alcoholic beverage bars,” which has the code 722515.
How to find your Principal Business Code
It’s worth noting that government agencies like the Social Security Administration, Census Bureau, and Internal Revenue Service frequently assign their own business activity codes based on information gleaned from your company’s documents.
This means that the numerical sequence of your code with the IRS may differ in documents from another agency. Follow these simple steps to find your specific business tax code:
1. Identify your primary industry through a search
The North American Industry Classification System’s initial two-digit numbers are used to assign all businesses to one of 20 different sectors. So, to name one more example, businesses in the food service, accommodation, and drinking places sector would have 72 as their business code. Aside from searching through the North American Industry Classification System’s platform, you can also search for business code IRS classifications via the U.S. Census Bureau’s platform or the IRS itself on its list of principal business codes.
2. Determine your business’s subcategory
Under its 20 main categories, the North American Industry Classification System lists 96 additional subcategories describing companies’ more specific activities in each major industry. This portion of the primary business code is a three-digit number that reflects the types of business activities in which your organization is involved. Accommodation, for example, would be a subcategory of the food, accommodation, and drinking places sector.
3. Identify your business’s industry group
The North American Industry Classification System has 317 industry types that can be correlated to your business within each subcategory. Look for the industry group that best describes your primary activity when determining the industry group that best fits your business’s operations and activities. For example, a hotel business may fall under the industry group of traveler accommodations in the accommodation subcategory.
How the Principal Business Code Applies to Taxes
When you file your employer taxes, the IRS requires your principal business code on every form you file. If you have a single principal business code, you enter that into your tax information. If your business falls into more than one distinct industry group, you should have principal business codes to reflect that. However, you generally only need to record the principal business code that corresponds to the business activities responsible for your primary revenue.
When filling out your business tax return, you typically need to include your principal business code (category and subcategory) along with a brief description, which is an outline of your principal business.
In conclusion, a principal business code is a set of guidelines that a business must follow to be considered successful. By following a principal business code, a business can increase its chances of being successful and maintain good customer relationships.