1120 Schedule H section 280H Limitations for a Personal Service Corporat

SCHEDULE H
(Form 1120)
(Rev. December 2011)
Department of the Treasury
Internal Revenue Service

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

OMB No. 1545-0123

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

Name

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

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
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
distribution requirement. Do not attach Schedule H to the PSC’s income tax
Schedule H with the PSC’s tax records.
5
Enter applicable amounts from the:
a 1st tax year before applicable election year . . . . . . . . . . . . . .
b 2nd tax year before applicable election year . . . . . . . . . . . . .
c 3rd tax year before applicable election year
. . . . . . . . . . . . .
6
Total. Add lines 5a through 5c
. . . . . . . . . . . . . . . . .
7
Enter adjusted taxable income for the:
a 1st tax year before applicable election year
. . . . . . . . . . . . .
b 2nd tax year before applicable election year . . . . . . . . . . . . .
c 3rd tax year before applicable election year 1 . . . . . . . . . . . . .
8
Total. Add lines 7a through 7c
. . . . . . . . . . . . . . . . .
9
Divide line 6 by line 8 . . . . . . . . . . . . . . . . . . . . .
10
Enter the percentage from line 9 or 95%, whichever is smaller . . . . . . .
11
Enter adjusted taxable income for the deferral period of the applicable election year
12
Amount figured under 3-year average test. Multiply line 11 by line 10 . . . .
13
Minimum distribution requirement. Enter the smaller of line 3 or line 12 . . .

.
in
.
.
.

1
2
3
4

%

the minimum
return. Keep

.
.
.
.

.
.
.
.

.
.
.
.

.
.
.
.

.
.
.
.

5a
5b
5c
6

.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.

7a
7b
7c
8
9
10
11
12
13

%
%

• 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
14
15
16
17
18
19

Maximum Deductible Amount (see instructions)

Enter amount from line 4 . . . . . . . . . . . . . . . . . .
Enter number of months in deferral period of applicable election year . . .
Divide line 14 by line 15 . . . . . . . . . . . . . . . . . .
Nondeferral period. Subtract the number of months in the deferral period
months in the applicable tax year. Enter the result . . . . . . . . .
Multiply line 16 by line 17
. . . . . . . . . . . . . . . . .

. . . . . .
. . . . . .
. . . . . .
from the number
. . . . . .
. . . . . .

.
.
.
of
.
.

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 Paperwork Reduction Act Notice, see the Instructions for Form 1120.

Cat. No. 14491P

14
15
16
17
18

19

Schedule H (Form 1120) (Rev. 12-2011)

Schedule H (Form 1120) (Rev. 12-2011)

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 employeeowners (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 at any time during that
year. See the instructions for line 1 for an
example of how to figure a PSC’s
applicable amounts.
Exception. Dividends paid by the
corporation and gain on the sale or

Page

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 and examples, see Temporary
Regulations sections 1.280H-1T(b)(4)(ii)
and 1.280H-1T(b)(4)(iii).
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

2

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, 2010. On October
1, 2010, S, an employee of PEK, owned
no stock of PEK; however, on March 31,
2011, S acquired 10 of the 200
outstanding shares of PEK stock. During
the period October 1, 2010 to March 31,
2011, S earned $40,000 of
compensation as an employee of PEK.
During the period April 1, 2011, to
September 30, 2011, 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, 2011,
was otherwise deductible by PEK and
includible in S’s gross income. For its
2011 tax year, 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.