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Principal Business Codes – Tax Guidelines for Entrepreneurs

Whether your business itself is new or you’re taking a stab at doing your own business taxes for the first time, you’ve likely already encountered a form that asks for your principal business activity code (PBC) or North American Industry Classification System code (NAICS). Fortunately, once you know what you’re looking for, these codes are actually quite easy to find. Picking one can be tricky, though, as it requires you to classify your business activities into a predetermined category.

What Is The Principal Business Code?

Sometimes called the Professional Activity Codes, the Principal Business Activity codes are 6-digit numbers assigned to certain business activities. These codes tell the IRS and others what your business does. A construction firm that builds houses, for instance, has a different number than a business that alters clothing or builds websites.

There are actually three such codes: the first two are the PBC and the IRS business activity codes. Fortunately, both of these codes use the same designations as the NAICS codes, which are examined and updated every five years. Since these numbers have been standardized so well, you can use them interchangeably. If a form asks for your PBC number, it will usually be the same as your NAICS or IRS business activity code number.

North American Industry Classification System (NAICS) Explained

The NAICS is a business classification system developed and agreed upon by the United States, Canada and Mexico. The numbers in these codes are in no way random: each denotes something different. The first two digits define a business’ economic sector. Is the business a manufacturing enterprise or is it part of the arts and entertainment industry? The first two digits answer that question.

The third digit places the business into a subsector within its economic category while the fourth narrows the field further, denoting the industry group. The fifth digit represents the NAICS industry and the last the national industry. Each number narrows the field and offers more specific information about what a company does. This still feels about as clear as mud, so let’s turn to an example for help.

Let’s say you own a retail store that sells recreational vehicles like motorcycles and ATVs. Your NAICS code is 441221. Here is how it breaks down, courtesy of The Nest:

44-45 Retail Trade
441 Motor Vehicle Parts Dealer
4412 Other Motor Vehicle Dealers
44122 Motorcycle, Boat and Other Motor Vehicle Dealers
441221 Motorcycle, ATV and Personal Watercraft Devices

What is the Purpose of a Principal Business Code?

The government is always measuring and seeking out information that can help them monitor the economy. NAICS codes allow the government to compile data on which industry sectors are growing, how much each contributes to the economy, and other similar information. It also shows when a certain industry is shrinking or struggling. This data is compiled into a wide variety of reports and government studies.

Although created for statistical purposes, the Small Business Administration (SBA) has used NAICS codes to determine what qualifies as a “small business” in different industrial categories. Sometimes companies allow project bids to come only from businesses within a certain NAICS category as well.

How to Identify Your Principal Business Code

If you need to find your NAICS code, there are several ways to do so. Often the IRS will provide a list of NAIC codes in the instructions of any form that asks for it. The NAICS Association also maintains a list on their website. To find your number on the list, locate your general industry first and then choose the appropriate subcategories.

When choosing your PBC number, it’s important that you focus on your primary business activities. If you have a car repair shop, for instance, but happen to sell snacks and candy in your waiting room, your primary business is mechanical repairs. That is the business code you would choose. The retail sale of snacks and beverages is a minor part of what you do, so you need not assign that particular activity a code.

Note that there is no official government agency that assigns NAICS codes. It’s up to you to decide which code best fits your business. If your business shifts or changes substantially over time, you’ll simply start using a different NACIS or PBC. There is no need to formally change it with a specific central agency or group. You should try to find a code that reflects your business accurately, but don’t stress about it. No one is coming after you if your classification isn’t perfect.

Which Tax Returns Need an IRS Business Code?

Tax forms change, so you could encounter an unexpected request for an NAICS code. At the moment, however, the following tax forms and returns will ask you for this number:

Schedule C
U.S. Return of Partnership Income – Form 1065
U.S. Corporation Income Tax Return – Form 1120
U.S. Income Tax Return for an S Corporation – Form 1120-S

In addition to tax forms, you may be asked to provide an NAICS number if you apply for an SBA loan program. You’ll also need to provide this information if you elect to become a contractor for the federal government. Businesses completing census forms are also required to provide an NAICS number.

Sometimes it’s hard to pigeonhole your business into a predetermined NAICS category, especially if you’ve diversified your offerings across multiple industries. In this case, there is a code labeled “other” that you can use.

Before you do so, however, give the professionals at Picnic Tax a try. We’re here to serve and can help you choose the right PBC code for your business if you’re having trouble narrowing it down.

As always, we’re also glad to help with any other tax questions you may have. Picnic Tax CPA’s are eager to make your taxes as easy as possible and to make sure the tax process is never unnecessarily overwhelming, frustrating or confusing.