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The Internal Revenue Service requires that businesses report their Principal Business Activity Code on their federal tax return. There are over 400 business activity codes from which a business owner or accountant can select as the appropriate one for their principal activity from a table in the tax return instructions. However, for many small- and medium-sized businesses, even this level of detail does not provide enough specificity to determine which is the right business activity code for the business.
Since the IRS business activity codes are based on the North American Industry Classification System (NAICS pronounced Nakes), NAICSCode.com has constructed a more detailed searchable index of NAICS codes, their descriptive titles, and over 18,000 additional terms that provide alternative descriptions of these industries. With this level of detail, you should be able to find the right business activity code for almost any type of business.
According to the IRS, classifying a business “facilitates the administration of the Internal Revenue Code.” Practically speaking, the business activity code helps the IRS to determine for auditing purposes what is the right comparison group for a business. The IRS uses computer programs to compare financial ratios of a business with the same ratios for a comparable grouping of businesses in the same industry and within the general size range. Companies that show substantially different ratios from the average for their industry group are more likely to be flagged for further scrutiny.
For the IRS, the more accurate the activity code designations are, the better this screening process will work. The IRS does not rely solely upon the business activity codes for categorization. They also request a brief description of the company’s principal business activity and of the company’s principal product or service.
For owners or accountants preparing tax returns for a business, the business activity code is the most important indicator used to determine the peer group for comparison in the IRS audit screening programs. The IRS uses computer programs to compare financial ratios of a business with the same ratios for a comparable grouping of businesses in the same industry and within the general size range. Companies that show substantially different ratios from the average for their industry group are more likely to be flagged for further scrutiny.
Visit www.naicscode.com/ for more information.