NAICS codes are 6 digit codes that classify your company’s business into a particular business sector. Each digit marks a different classification for your business. The first two digits of your NAICS code signifies the major group or sector of an establishment. There are 20 different industry sectors that these two digits define. The last four digits are used to further classify subsectors, industry groups, industry types, and industry by nation.
NAICS codes are step up in a way that businesses can self identify under a certain code, but federal agencies who use NAICS codes may designate your business a code based on their own criteria.
For more on NAICS codes (and SIC codes, which NAICS codes replaced as the main classification system in 1997) see here.
Here are a few of the ways your NAICS code is used and how an incorrect NAICS code could affect you:
1. Determining the size of your business
The U.S. Small Business Administration sets size standards for what is considered a “small” business. The size of your business will determine whether or not you qualify for certain federal contracting opportunities.
Each industry, classified by its NAICS code, has a particular size standard. Size standards are usually measured by average annual receipts or average number of employees.
For example, if your business is a Soybean farm (NAICS code 111110), you are only considered “small” if your gross annual revenue less than $750,000. However, if you own a residential remodeling business (236118), your gross annual revenue can be up to $36.5M and you will still be a small business. A footwear manufacturer (316210) is small if they have less than 1,000 employees, but all wholesale traders (sector 42) are only small if they have less than 100 employees.
Here’s how a wrong NAICS code might affect you here: some similar NAICS codes have wildly different size standards. For example, a Recreational Goods Rental business (532292) has a cap of $7.5M, whereas a Truck, Utility Trailer, and RV (Recreational Vehicle) Rental and Leasing business (532120) has a $38.5M cap. If your current NAICS code disqualifies you from federal, local, or even private small business contracts when you could be bidding on contracts under another industry classification that better describes your product or service, you may want to consider changing your NAICS code.
2. To determine qualification for financing
Certain industries that are considered extremely high risk—such as pawn shops, political campaigns and gambling activities—will raise a huge red flag for lenders. Banks and alternative lenders will be looking at the NAICS codes of potential business borrowers to determine if they fall into one of these high risk industries. In fact, your NAICS code could make or break your ability to secure a loan from your best lending partner!
Let’s look at an example of how this might affect you: Local freight hauling was deemed one of the safest new business industries. A local freight hauling business would likely fall under the NAICS subsector 484 for Truck Transportation. One of the riskiest industries to start a business is passenger transportation, which would likely fall under NAICS subsector 485, or Ground Passenger Transportation. Although these two subsectors are so close in number, they have such different risk levels—one number could be the difference between a potential lender considering your application or trashing it from the get-go. When applying for a loan, make sure lenders are pulling the right NAICS code for your business.
3. Specific Tax Deductions
Federal and state agencies use NAICS codes for tax purposes, and your state Tax Department uses them to collect and analyze data related taxes and create reports regarding taxation issues. Your state government also uses NAICS codes to offer tax incentives to certain industries. Under the wrong NAICS code, you may be missing out on these incentives.
How to change your NAICS code
NAICS codes may seem trivial, but if you’re interested in government contracts, financing options, or certain tax incentives, they will be important for your business. You can check out all the NAICS codes here (there are tons of them!) to decide which one best describes your business activity.
You can view your NAICS code by visiting your scoreboards in the REPORTS tab of your Nav account. From there, you can view any of your full business credit reports to see both your NAICS and SIC codes. If you’re interested in changing your NAICS code that was issued to you by a federal agency, you can do so by contacting that federal agency. If your business credit report lists an incorrect SIC or NAICS code, use Nav’s CreditSweeper tool to begin the correction process.