Filing income taxes can be a tasking activity for business owners, especially if preparing their tax returns without a professional’s help. Tax law is constantly evolving, and the rules that businesses must abide by changes with it. 

Among them is the principal business code; it is a common item to all primary business tax returns. The principal business code is a crucial part of the business tax return every business owner must understand.

Principal Business Code – An Overview

Principal business code, also known as Professional activity code (PBC), is a six-digit number that groups the major type of business service you render. The code is used for filing federal tax returns with the Internal Revenue Service (IRS) when you are applying for a loan with the U.S. Small Business Administration (SBA), and other U.S. government identification purposes.

The principal business is the primary business activity as established by analyzing all that is put into a business – the amount of capital, labor, time, attention, etc. and by also evaluating the sources of the net income and gross income. If the above-mentioned carries lesser weight, the name, outlook, and advertising of the business might also be taken into consideration.

Operating activities are the major business activities a company carries out to earn revenue. These activities affect the cash flow coming in and out of the business entity and determine the business’s net income. Some major operating activities for business include administration, sales, customer service, marketing, etc. 

These activities are all part of the normal functioning that impacts the company’s monthly, quarterly, and annual income and profits. They also provide a larger portion of the cash flow and determine profitability.

For the IRS, a business’s activity principal business code is established by the business activity that generates most of its revenue. Principal business activity codes are based on the North American Industry Classification System (NAICS), which was jointly created by the U.S., Canadian and Mexican governments. These codes are updated every five years, and it was last updated in 2017.

How a Principal Business Code Works

Every business tax return filed in the United States is required to have a principal business activity code, this includes partnerships, S corporations, C corporations, and sole proprietorships. To determine your business activity code, a detailed description of your actual business operation is required. To know your business activity code, click here.

A schedule of the principal business codes (PBCs) is issued in the directives for IRS Schedule C, which is used to report a profit or loss from a sole proprietorship or single-member LLC, and in the directives for other business tax forms. The first two digits of a Principal Business Code denote comprehensive categories such as Agriculture, Forestry, Fishing, and Hunting (11) and Manufacturing (31-33). 

In the Schedule C instructions, these categories are registered alphabetically, while on the NAICS website, they are registered in numerical order. Within each category, business owners can find the narrative that depicts their business. 

For business owners who cannot find where their business fits, they can choose a description that starts with “other” or “all other.” 

For a business entity that has several sources of income, you can simply record the one that takes in many revenues. It is advisable to record tax returns individually if you have more than one company.

Getting a Principal Business Code

Most government agencies that utilize the Principal Business Code usually give the code based on the information issued by a business entity. Thus, a business owner can influence what his/her principal business code is. Classifying your company’s PBC is more intricate than it seems because some businesses are not as evident as others. This is because it is impossible to add every business form in a grouping system. While sometimes, it might take a while to get the perfect description of your business that’ll suit a category.

To simplify the whole process, the wholesale, retail, and other service industries are grouped individually. So, all a business owner needs to do is to find the category or industry that best describes their business. In a case where you cannot fit your business into any category, you can list them under the others category, or use this code – 541990.

Filing PBC on Your Business Tax Return

You’ll need to provide both a principal business report and the principal business code for most businesses. When giving your business details, it is important to include the category your business fits in and provide more specific information on your clients/customers.

To file your tax return on sole proprietorships and single-owner LLCs businesses, which is grouped “schedule C”;

  • Input the principal business details on Line A
  • Enter the principal business code on Line B

For partnership and multiple-member LLCs, (Form 1065);

  • Input the principal business details on Line A
  • Enter a summary of the principal product or service on Line B
  • Input the principal business code on Line C

While for corporations, (Form 1120);

  • Input the principal business code on Schedule K, Line 2a
  • Enter the principal business details on Schedule K, Line 2b
  • Input the product/service details on schedule K, Line 2c

For an S Corporation (Form 1120-S), for principal business description is required, just;

  • Input the principal business code on Line B

How to Use the Principal Business Code

A principal business code can be used in several ways and by different entities. The Census Bureau and the IRS can both use the PBC for statistical reasons, e.g., the U.S Census Bureau uses the code to gather, investigate and publish the statistical details related to the U.S business economy. 

For an institution like the IRS, the codes are used to get information about businesses to compare revenue, and also in some cases, it is used to check the standard of different businesses. While for Small Business Administration (SBA), it links the business’s sizes with either the average employment status or annual receipts.