An Easy Guide to Principal Business Codes in 5 Questions
If you own a business, you have probably filed your business taxes and heard of NAICS and the principal business codes. If you’re newly self-employed and it’s your first time filing, these terms might be new to you. Either way, it’s essential to understand what these codes are and when they come into play.
Below, we’ve compiled an easy guide to principal business codes, which are primarily used for:
Filing federal business tax returns with the IRS
Applying for loans with the U.S. Small Business Administration (SBA)
Other U.S. government identification purposes
In our simple breakdown of the business tax codes, we’ll explain:
What they are
How the NAICS structure works
What they are used for
How they are assigned & how to identify yours
How to use it on your business tax return
What are principal business codes?
A principal business code is a six-digit number determined by the activity that generates the most revenue for your business. Simply put, it classifies the main type of products or services you sell. They are also known as Professional Activity Codes, Primary Business Codes, or Business Activity Codes.
Principal business codes are based on the North American Industry Classification System (NAICS), which was established by the U.S., Canadian, and Mexican governments. It is updated every five years and was last updated in 2017.
How does the NAICS structure work?
NAICS is a two- through six-digit hierarchical classification system with five levels of detail. The first two digits indicate broad categories, such as Construction (23) or Professional, Scientific, and Technical Services (54). From there, the codes get more specific based on subcategories.
For example, a company that builds homes falls under code 2361 for Residential Building Construction, and if they specifically perform New Single-Family Housing Construction, their code is 236115.
What are principal business codes used for?
Government agencies like the Internal Revenue Service (IRS) and U.S. Census Bureau use your principal business code for statistical purposes, such as collecting year-to-year revenue and other useful numbers.
Additionally, the SBA uses principal business code to determine the size of your business and distinguish small businesses from medium and large corporations. They use annual receipts or average employment to set size standards for each type of business. The agency then decides if your business qualifies as a “small business” for SBA loan purposes.
How do I find my business tax code?
Government agencies typically assign a code based on the information you’ve provided about your business. They determine your code based on the information you’ve provided on tax forms, surveys, or administrative records. For instance, the SBA might assign your code when you request an Employer Identification Number (EIN).
You can find a list of the codes on the IRS Schedule C, which sole proprietors and single-member LLCs use to report profit or loss. You can also search for the code that best fits your business on the NAICS Association’s lookup tool.
Within a category, go to the subcategory that best suits your business. If you own a bed-and-breakfast, for example, you would go to “Accommodation and Food Services” (72), then to “Bed-and-Breakfast Inns,” which has code 721191.
What do I need to do on my tax return?
You must include your principal business code on all business tax returns. If your business has several revenue streams, enter the code for the most significant source of income.
Typically, you’ll need to provide a principal business description and the principal business code. This brief explanation should include the category and a few specifics on your customers or clients. Below are quick steps on how to enter the code on each type of business tax return.
Schedule C - Sole proprietorships and single-member LLCs: Enter the principal business description on Line A and the principal business code on Line B. Learn more about Schedule C.
U.S. Return of Partnership Income (Form 1065) - Partnerships and multiple-member LLCs: Enter the principal business description on Line A, a brief description of the principal product or service on Line B, and the code on Line C. Learn more about Form 1065.
U.S. Corporation Income Tax Return (Form 1120) - C corporations: Enter the code on Schedule K, Line 2a; the principal business description on Schedule K, Line 2b; and the product or service description on Schedule K, Line 2c. Learn more about Form 1120.
U.S. Income Tax Return (Form 1120-S) - S Corporations: Enter the code on Line B. No principal business description necessary. Learn more about Form 1120-S.
A critical part of tax season is ensuring you have all the information you need to fill out and file each necessary form correctly. If you have additional questions about the principal business codes or general concerns about your business taxes, contact us today at 603-505-2368 or schedule a free consultation. We’ll keep you updated on the latest business tax news and rules.