to search for your organizations correct
Principal Business Activity Code as defined by the IRS (Internal Revenue
What Is Your Principal
Internal Revenue Service requires that businesses report their
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.
the IRS business activity codes are based on the North American Industry
Classification System (NAICS pronounced Nakes),
Axiom Valuation has
constructed a more detailed searchable index of 981 NAICS codes (excluding
agriculture, forestry, fishing, and hunting activities), 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
Why Is the Right Business
Activity Code Important ?
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.
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.
Why Is the
Right Business Activity Code Important for You?
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.
What Happened to the SIC Code
Industrial Classification (SIC) has been replaced by the North American
Industry Classification System (NAICS pronounced Nakes). The SIC system was
established in the 1930s to promote uniformity and comparability of data
collected and published by agencies within the U.S. government, state
agencies, trade associations, and research organizations. It was developed
as an establishment based industry classification system that classified
each establishment (defined as a single physical location at which economic
activity occurs) according to its primary activity. The SIC covered the
entire field of economic activities by defining industries in accordance
with the composition and structure of the economy.
the 1930s, the SIC has been revised periodically to reflect changes in the
economic structure of the United States. New industries were added and
small, declining industries deleted or combined with other activities.
However, the overall structure of the SIC remained essentially unchanged
since the 1930s. The SIC was last revised in 1987, when approximately 20 new
service industries were added to the SIC and a few new industries were added
to manufacturing to reflect technological changes occurring in that sector.
early 1990s, many data users and analysts were criticizing the SIC as
outmoded and not reflective of the economy of the United States. The
adoption of the North American Free Trade Agreement underscored the need not
only to develop a new system, but also to develop that system in cooperation
with Canada and Mexico.
is based on a consistent, economic concept. Establishments that use the same
or similar processes to produce goods or services are grouped together. The
SIC, developed in the 1930s and revised periodically over the past 50 years,
was not based on a consistent economic concept. Some industries are demand
based while others are production based.