IRS Principle Business Codes: A Guide for Managers

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 IRS business codes, which the Internal Revenue Service uses to analyze your business tax returns and financial information. This guide describes what a principal business code for taxes is and why you need one so you can file correctly on your next business tax return.
 
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What is an IRS principal business code?

An IRS 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. It classifies the types of services and products your business brands itself around and sells, the industry the business operates in and the major consumer market that makes purchases from the business.
 
The IRS principal business code the tax agency uses to categorize your business is part of the North American Industry Classification System and is determined by the types of business activity you perform most to generate revenue for your company and for the IRS. Theoretically, this means that this code is derived from the business activity that yields the highest percentage of production costs and investment in capital goods. In many cases, though, revenue and employment share determine a company’s business code.
Read more: Defining Business Metrics: A Guide for Managers
 

The purposes of a principal business code

The IRS and the Census Bureau use your principal business code for statistical information and to compare year-to-year revenue and other figures you report as part of your general commercial regulatory compliance.
 
When you grow your business, you have a principal business code the United States Census Bureau uses to collect, analyze and publish statistics related to the U.S. economy. Additionally, the Small Business Administration connects the principal business code of your business’s industry to the size of your business. This helps distinguish small-to-medium businesses from large corporations.
 
Furthermore, businesses use these business activity codes to file their tax returns with the IRS and apply for loans with the U.S. Small Business Administration. Principal business codes are also created and used for certain other business identification purposes with the U.S. government. The principal business code for taxes is also sometimes called the professional activity code.
 

How the principal business code works

Principal business codes are assigned in alphabetical order of the industry they apply to and can be found in the instructions for IRS Schedule C. Sole proprietorship or single-member LLC companies use this form to report their profits and losses. These business code Schedule C listings are also available on other business-related tax forms and information sheets. Another place where you can find them is the North American Industry Classification System website, which offers a searchable interface for locating business activity codes for the IRS.
 
The breakdown of IRS business codes reveals how they’re used to classify businesses and business activity. The first two digits classify a business based on the broad category it’s principally involved in. Thus, businesses mainly operating in the broadly defined areas of fishing, hunting, agriculture, forestry, animal husbandry and all supporting industries start with an 11 as their first two digits. In another example, companies mainly working in construction and civil engineering industries have business activity code IRS designations that start with 23.
 
Within each of these broad industry categories are multiple smaller market niches for certain aspects of each industry. You can look these up for your company’s main activity to find its complete IRS principal business code. For example, one of the subcategories under the general category of construction-related codes starting with 23 is Residential Building Construction, which is coded as 236110. If your business generates most of its labor and revenue from constructing apartment buildings, then this code would apply to its tax filings.
 
There’s also a category for All Other and another for All Other Personal Services. Both of these can be used as catch-all business activity code IRS categories for companies whose activities don’t clearly fit into any of the major areas of industry-specific business codes.
 

How to find your principal business code

It’s worth noting that government agencies such as the Social Security Administration, Census Bureau and Internal Revenue Service often assign their own business activity codes based on the information they already have from documents filed by your company. This means it’s possible for your code’s numerical sequence with the IRS to differ in documents from another agency. To find your specific business code for taxes, follow these simple steps:
 

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 into 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

The North American Industry Classification System lists 96 further subcategories under its 20 main categories that describe the more specific activities of companies in each major industry. This part of the principal business code is a three-digit number and further reflects the types of business activities your organization is involved in. For instance, accommodation would be a subcategory under the food, accommodation and drinking places sector. 
 

3. Identify your business’s industry group

Within each subcategory in the North American Industry Classification System are 317 industry types that you can correlate to your business. To determine the industry group that best fits your business’s operations and activities, look for the one that describes your primary activity. For instance, in the accommodation subcategory, a hotel business might fall under the industry group of traveler accommodations.
 
Often, the IRS also assigns your business its principal business code. Additionally, if you have more than one location, select a principal business code that reflects the primary activities within all your business locations. You may also choose a second principal business code if you feel your business’s activities reflect the characteristics of another industry.
 

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 simply 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 you’re 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.
 

Frequently asked questions about IRS business codes

 

Who assigns business activity codes to businesses?

There’s no central authority for assigning business codes or monitoring them for specific businesses by industry. Instead, different agencies give different codes to companies based on their own documentary assessments and interpretations of filed information. If you find your principal business code questionable in any document received from non-IRS government sources such as the Small Business Administration, contact the agency in question to clarify the matter.
 

Can I change my IRS business code?

There isn’t an official way to have your business code changed because there’s no central registry that has the final say on this number for any business. Government agencies other than the IRS usually base their codes on IRS documents, but they also sometimes create their own codes for businesses listed with them based on their own criteria. In other words, you can probably modify your IRS principal business code by changing the statement about your business activities in your next IRS tax filing.
 

Does the principal business code registry change over time?

Yes. The NAICS classification system gets a scheduled review every five years to reflect changes and industry advances in the economy. NAICS maintains a fact sheet that explains this process in depth.

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