What Is the 1120-S Business Activity Code?

An S corporation must report its primary source of revenue to the Internal Revenue Service (IRS) using a specific six-digit number on its annual tax return. These codes are derived from the North American Industry Classification System (NAICS), a framework used by federal agencies to classify businesses. For the IRS, these codes help categorize companies based on the type of activity they are engaged in. Every S corporation is required to include this code on its Form 1120-S, U.S. Income Tax Return for an S Corporation.

Selecting the Correct Business Activity Code

The complete list of business activity codes is provided within the official IRS Instructions for Form 1120-S. A company must identify its principal business activity. The principal activity is the one that accounts for the largest percentage of the corporation’s “total receipts.” The IRS defines total receipts as the sum of gross sales, income from other sources like interest and dividends, and specific gains reported on Schedules K and Form 8825.

Consider a business that provides both IT consulting services and sells proprietary software. If the company generated $300,000 in consulting fees and $200,000 from software sales, its principal business activity would be IT consulting. The company would then search the list of codes under categories like “Professional, Scientific, and Technical Services” to find the one that best describes computer systems design or related consulting.

It is common for a business to not find a code that perfectly describes its operations. In such cases, the IRS directs the filer to select the code that most closely represents their main business activity. If no specific category seems appropriate, there are broader “Other” categories available. As a last resort, the code 999999 is available for unclassifiable establishments.

Entering the Code on Form 1120-S

Once the correct six-digit code has been determined, it must be entered in two places on the first page of Form 1120-S. The first location is Item A, labeled “Principal business activity,” where you must write a short phrase identifying the main operation, such as “Software Development.” The second is Item C, “Business activity code number,” where you enter the six-digit code. Misplacing this information or leaving it blank can lead to processing delays or inquiries from the IRS.

Handling Changes in Business Activity

A company’s primary source of revenue can shift over time. For example, a retail store might find that its e-commerce sales now surpass its in-store revenue. When such a change occurs, the S corporation must update its business activity code on its next tax return to reflect the new principal activity.

The process for updating this information does not require filing a separate notification form with the IRS. The business simply uses the new, correct code on its current-year Form 1120-S. The code used on the tax return should always correspond to the activity that generated the largest percentage of gross receipts for that specific tax year. Using the correct code ensures that the data collected by the IRS accurately reflects the company’s current operations.