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NAICS Codes Make a Difference

Making sure that you have the right NAICS Code for your business can make a big difference in whether or not you are audited.

Sometimes it is just a little thing that can trip you up. For years I had the same big accounting firm do my taxes. As it turns out, they had me coded as a retail store owner.  I’m basically a professional speaker. A retail store owner doesn’t fly 200,000 miles in a year, so that was an automatic flag. I was getting audited at least once every five years.

Over and over again, I had to deal with the significant work hours, stress, and expense that came of yet another audit, whether or not they found any adjustments to be made. I never thought to check my NAICS code.  Fixing it to list me correctly as a public speaker will save me thousands that otherwise would have been siphoned away as lost work hours for me and paid work hours for my secretary and accountant.

Never heard of the NAICS Code?  The IRS explains it this way:

This list of principal business activities and their associated codes is designed to classify an enterprise by the type of activity in which it is engaged to facilitate the administration of the Internal Revenue Code. These principal business activity codes are based on the North American Industry Classification System.

Every business tax return filed in the U.S. is required to have a principal business activity code, including sole proprietorships, partnerships, S corporations and C corporations. The code is six digits long. The first two digits designate the largest business sector, the third designates the subsector, the fourth designates the industry group, the fifth designates particular industries, while the last digit designates national industries.  The IRS uses these codes by comparing ratios of companies in a similar industry.  Companies that deviate significantly from expectations are flagged for audit.

Beyond audit risk assessment, the Department of Revenue also uses the code to inform taxpayers within a certain industry of law changes that may affect them. With tax laws changing every two seconds, do you really want to miss out on any alerts that could alert you to how your business will be taxed? Taxation is the major impediment to wealth. Anything you can do to minimize your taxes equals greater real profit for you.

Lee Phillips, JD

PS: Ben Rucker, the young man in the video with me, was the one who found my erroneous code.  He has written some other articles for me which can be found here, here, and here.

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