Schedule H (Form 1 Section 280 H Limitations for a Personal Services Corpor

Schedule H (Form 1120), Section 280H Limitations for a Personal Service
Corporation (PSC) (Rev. December 2006)
Purpose: This is the first circulated draft of the December 2006 revision of
Schedule H (Form 1120) for your review and comments. The major changes are
discussed below.
TPCC Meeting: None, but may be arranged if requested.
Other Products: Circulations of draft tax forms, instructions, notices, and
publications are posted at:
http://taxforms.web.irs.gov/draft_products.html
Comments: Please email, fax, call, or mail any comments by May 19, 2006 to:
Joan A. McAlpine
Tax Forms and Publications
SE:W:CAR:MP:T:B:R
Email: [email protected]
Phone: 202-622-3622

Major changes to Schedule H (Form 1120) (Rev. December 2006)
Schedule H is being changed from being an annual schedule to a continuous use
schedule, beginning with the December 2006 revision. There are no major
changes to the form or instructions.

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SCHEDULE H
(Form 1120)
(Rev. December 2006)

I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
SCHEDULE H (FORM 1120), PAGE 1 of 2
MARGINS: TOP 13mm (1⁄ 2 "), CENTER SIDES PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20.
INK: BLACK
FLAT SIZE: 216mm (81⁄ 2 ") 3 279mm (11")
PERFORATE: NONE
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

Action

Date

O.K. to print
Revised proofs
requested

Section 280H Limitations for a Personal Service
Corporation (PSC)

Department of the Treasury
Internal Revenue Service

Name

©

Signature

OMB No. 1545-0123

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Attach to PSC’s income tax return if Part II is completed.

Employer identification number

Note: A newly organized PSC is considered to have met the section 280H distribution requirements for the first year of its existence
and does not have to complete Schedule H. If, during the tax year, an existing corporation becomes a PSC and makes a section
444 election, the corporation is treated as if it were a PSC for the 3 preceding tax years. See Temporary Regulations section
1.280H-1T(e).

Part I
1
2
3
4

5
a
b
c
6
7
a
b
c
8
9
10
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Minimum Distribution Requirement (see instructions)

Enter applicable amounts from preceding tax year
Divide number of months in deferral period of preceding tax year by number of months in
preceding tax year. Enter the result as a percentage
Amount figured under preceding year test. Multiply line 1 by the percentage on line 2
Enter applicable amounts from the deferral period of the applicable election year
If line 4 is less than line 3, go to line 5. Otherwise, stop here. The PSC has met the minimum
distribution requirement. Do not attach Schedule H to the PSC’s income tax return. Keep
Schedule H with the PSC’s tax records.
Enter applicable amounts from the:
1st tax year before applicable election year
2nd tax year before applicable election year
3rd tax year before applicable election year
Total. Add lines 5a through 5c
Enter adjusted taxable income for the:
1st tax year before applicable election year
2nd tax year before applicable election year
3rd tax year before applicable election year
Total. Add lines 7a through 7c
Divide line 6 by line 8
Enter the percentage from line 9 or 95%, whichever is smaller
Enter adjusted taxable income for the deferral period of the applicable election year
Amount figured under 3-year average test. Multiply line 11 by line 10

Minimum distribution requirement. Enter the smaller of line 3 or line 12
● If line 13 is equal to or less than line 4, stop here. The PSC has met the minimum distribution
requirement. Do not complete Part II and do not attach Schedule H to the PSC’s income tax
return. Keep Schedule H with the PSC’s tax records.
● If line 13 is more than line 4, the PSC’s deduction for applicable amounts is limited under section
280H. Complete Part II to figure the maximum amount the PSC can deduct.

Part II

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2
3
4

%

5a
5b
5c
6
7a
7b
7c
8
9
10
11
12

%
%

13

Maximum Deductible Amount (see instructions)

14

Enter amount from line 4

14

15

Enter number of months in deferral period of applicable election year

15

16
17

Divide line 14 by line 15
Nondeferral period. Subtract the number of months in the deferral period from the number of
months in the applicable tax year. Enter the result

16
17

18

Multiply line 16 by line 17

18

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Maximum deductible amount. Add lines 14 and 18. The PSC’s deduction for applicable amounts
paid or incurred to employee-owners is limited to this amount. Attach Schedule H to the PSC’s
income tax return. Any amount not allowed because of the section 280H(d) limitation is treated as
paid or incurred in the PSC’s succeeding tax year

For Privacy Act and Paperwork Reduction Act Notice,
see the Instructions for Forms 1120 and 1120-A.

Cat. No. 14491P

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Schedule H (Form 1120) (Rev. 12-2006)

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I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
SCHEDULE H (FORM 1120), PAGE 2 OF 2
MARGINS: TOP 13mm (1⁄ 2 "), CENTER SIDES PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20.
INK: BLACK
FLAT SIZE: 216mm (81⁄ 2 ") 3 279mm (11")
PERFORATE: NONE
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

Schedule H (Form 1120) (Rev. 12-2006)

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

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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 employeeowner 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

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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.