Identifying Your Business

Whether your business is organized as a sole proprietorship, partnership, limited liability company, or corporation, your annual income tax form requires you to provide your business name (if it's different from your own name), your principal business or profession, your principal business code, and your employer identification number (EIN), if you are required to have one.

Employer identification numbers. Sole proprietors need to have an EIN only if they have one or more employees, if they have a qualified retirement plan, or if they are required to file excise, employment, alcohol, firearms or tobacco tax returns.

All partnerships and corporations must have their own EIN. If you operate one or more businesses in forms other than sole proprietorship, you'll need a separate EIN for each business entity. If you purchase a business that requires an EIN, use your own EIN or get a new one - don't use the EIN of the previous owner. If you operate more than one business as a sole proprietor, you should use the same EIN for all your businesses.

You can apply for an EIN by mail, online, or fax (or if international, by telephone). To apply by mail, file Form SS-4, Application for Employer Identification Number, with the appropriate IRS Service Center for your state. It generally takes about four weeks to receive the number by mail. If you need to file your tax return before you receive the EIN, write "applied for" in the space where the EIN should go.

Planning Tools You can download Form SS-4 to aid in your financial planning.

International applicants should call (267)941-1099, which is not a toll-free call. You'll still need to fill out a paper SS-4 form and mail or fax it to the Service Center within 24 hours. The IRS representative will give you the correct fax number. The advantage of using this system is that you will receive the EIN immediately and you can use it on your tax forms right away.

However, the best opton is to apply online. The IRS has a free program that allows applicants who live in the United States to apply online for an EIN at the IRS website. The interface uses an interview style and doesn't require filing Form SS-4. It is quick, but some restrictions apply. The EIN is issued immediately.

Identify your business using the correct business codes. Whether you file a Schedule C or C-EZ, you'll need to enter a six-digit business code at the top of your annual income tax form. These business codes are based on the North American Industry Classification System (NAICS). The complete list of business codes can be found in the IRS instructions to the tax form that you file for your business: Schedule C or C-EZ for sole proprietors, Form 1065 for partners, Form 1120 for C corporations, or Form 1120-S for S corporations.

Planning Tools You can quickly obtain a list of business codes by using these business code tables.

It's very important that you use the correct business code. If your return is examined by the IRS, the agents may use this code as a screening device to determine whether your income and expenses are unusual for that type of business. If so, they may decide to dig further into your return (and ask you to produce a lot more records to prove your figures).

The IRS has been making an effort to educate its agents about typical operating procedures in different industries and even in specific types of businesses, so that the agents can more effectively ferret out underreported income and overstated deductions. The IRS is also aggressively targeting this area for audits if the numbers don't match their expectations. If you report the wrong business code, the IRS may be judging you by the incorrect standard.

Example If you operate a retail jewelry business, the IRS has a general idea of the percentage of your revenues that should be eaten up by your cost of goods sold. If you erroneously list your code as "453220," which applies to gift shops, your cost of goods sold may appear to be way out of line and your tax return may be flagged for an audit.

If you find that your business does not fit neatly into one of the business code categories listed by the IRS, consider whether you might actually be operating more than one business.

Did You Know? For a very useful free search tool to easily find the most appropriate IRS business activity code, NAICS code, or SIC code for an industry based on its descriptions, check out www.naicscode.com. The site allows a business owner to quickly sift through government industry descriptions to get the most accurate description of the business for reporting purposes. Using this site certainly beats trying to find your correct business code from a laundry list of codes in an IRS table.

If you're convinced that you're operating only one business, use the code that applies to the majority of your income and expenses. The IRS does provide a code 999999 for business owners that are unable to classify their operations, but we suggest that you use this only as a last resort.