Schedule H (Form 1120) (Rev. 12-2006) Page 2
General Instructions
Section references are to the
Internal Revenue Code unless
otherwise noted.
Purpose of Schedule
A personal service corporation (PSC)
(as defined in section 441(i)(2)) may
elect under section 444 to have a
tax year other than a calendar year.
A PSC that makes the election is
subject to the minimum distribution
requirement of section 280H for the
year the election is made and for
each tax year the election remains in
effect. If the PSC does not meet the
requirement, its deduction for
amounts paid or incurred to
employee-owners (see Applicable
amount below) is limited.
Use Part I of Schedule H to
determine if the PSC meets the
minimum distribution requirement of
section 280H(c) for the tax year. Use
Part II to figure the limits on
deductions under section 280H(d) if
the requirement is not met.
Who Must File
A PSC that has elected under
section 444 to have a tax year other
than a calendar year must complete
Schedule H. If the PSC does not
meet the minimum distribution
requirement of section 280H for the
tax year, it must file Schedule H with
its Form 1120. If it does meet the
requirement, it does not need to
attach the completed Schedule H to
its tax return, but it should keep it
with its tax records.
Definitions
Applicable election year. An
applicable election year is any tax
year in which a section 444 election
is in effect.
Applicable amount. An applicable
amount is any amount otherwise
deductible by a PSC in a tax year
that is includible (directly or
indirectly) in the gross income of a
taxpayer who is an employee-owner
during that year. See Temporary
Regulations section
1.280H-1T(b)(4)(iii) for examples of
how to figure a PSC’s applicable
amounts.
Exception. Dividends paid by the
corporation and gain on the sale or
exchange of property between the
owner-employee and the corporation
are not applicable amounts.
An amount is indirectly includible
in the gross income of an
employee-owner if the amount is
includible in the gross income of
certain related parties. For details,
see Temporary Regulations section
1.280H-1T(b)(4)(ii).
Employee-owner. An employee-
owner is a person who, on any day
of the PSC’s tax years:
Is an employee of the PSC or who
performs services for or on behalf of
the PSC (including an independent
contractor) and
Owns any outstanding stock of
the PSC.
Deferral period. The deferral period
is the number of months between
the last day of the elected tax year
and the last day of the required tax
year.
Example. The PSC elects a tax
year that ends on September 30.
Since the required tax year for a
PSC is the calendar year, the
deferral period is 3 months (the
number of months between
September 30 and December 31).
Nondeferral period. The nondeferral
period is the part of the tax year
that occurs after the part of the year
that constitutes the deferral period.
Adjusted taxable income. Adjusted
taxable income is taxable income
determined without regard to:
Applicable amounts and
Any NOL carryover to the extent
the carryover is attributable to
applicable amounts.
Adjusted taxable income for the
deferral period of an applicable
election year is the adjusted taxable
income that would result if the PSC
filed an income tax return for the
deferral period under its normal
method of accounting. Reasonable
estimates are acceptable.
For more information, see
Temporary Regulations section
1.280H-1T(c)(3)(iii).
Specific Instructions
Part I
Complete Part I to see if the PSC
meets the minimum distribution
requirement of section 280H(c). The
PSC meets the requirement if,
during the deferral period of the tax
year, the applicable amounts paid or
incurred for all employee-owners are
equal to or greater than the smaller
of:
The amount determined under the
preceding year test or
The amount determined under the
3-year average test.
Complete lines 1 through 4 to
determine if the preceding year test
applies to the PSC. If it does not,
complete the rest of Part I to see if
the 3-year average test applies.
Line 1. Enter the applicable amount
that was paid or incurred in the
preceding tax year to any
employee-owner of the PSC and
that was otherwise deductible by
the PSC on its preceding income tax
return.
Example. PEK, an accrual basis
personal service corporation with a
tax year ending September 30,
made a section 444 election for its
tax year beginning October 1, 2005.
On October 1, 2005, S, an employee
of PEK, owned no stock of PEK;
however, on March 31, 2006, S
acquired 10 of the 200 outstanding
shares of PEK stock. During the
period October 1, 2005, to
March 31, 2006, S earned $40,000
of compensation as an employee of
PEK. During the period April 1,
2006, to September 30, 2006, S
earned $60,000 of compensation as
an employee-owner of PEK. The
entire $100,000 compensation paid
to S during PEK’s tax year ending
September 30, 2006, was otherwise
deductible by PEK and includible in
S’s gross income. In 2006, it is an
applicable amount for PEK from the
preceding tax year.
See Temporary Regulations
section 1.280H-1T(c) for more
information, including examples of
the computation of the
preceding-year test and the 3-year
average test.
Part II
Complete Part II to figure the
maximum deduction under section
280H(d) for applicable amounts if
the PSC did not meet the minimum
distribution requirement figured in
Part I.
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