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

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).