Instructions for Schedule PH 

(Form 1120)

(Rev. December 2016)

(Use with the November 2015 revision of Schedule PH (Form 1120))

U.S. Personal Holding Company (PHC) Tax

Department of the Treasury

Internal Revenue Service

Section references are to the Internal 

Revenue Code unless otherwise noted.

Future Developments

For the latest information about 

developments related to Schedule PH 

(Form 1120) and its instructions, such 

as legislation enacted after they were 

published, go to www.irs.gov/

form1120.

What’s New

For tax years beginning after 

December 31, 2015, a corporation 

can elect to treat dividends paid after 

the end of the tax year and before the 

16th day of the 4th month following 

the end of the tax year as paid during 

its tax year. Special rules apply to 

corporations with tax years ending in 

June. See the instructions for line 12.

General Instructions

Purpose of Schedule

Use Schedule PH to figure the 

personal holding company (PHC) tax.

Who Must File

A corporation that is a PHC must file 

Schedule PH by attaching it to its 

income tax return.

Personal Holding 

Company

Generally, a corporation is a PHC if it 

meets both of the following 

requirements.

1. PHC income test. At least 60% 

of the corporation's adjusted ordinary 

gross income for the tax year is PHC 

income. See the instructions for Part II 

and the Worksheet for Figuring 

Ordinary Gross Income, Adjusted 

Ordinary Gross Income, and the PHC 

Income Test (Worksheet), later. Also, 

see Specific Instructions below.

2. Stock ownership 

requirement. At any time during the 

last half of the tax year, more than 

50% in value of the corporation's 

outstanding stock is directly or 

indirectly owned by five or fewer 

individuals.

For purposes of this requirement, 

the following organizations are 

considered individuals.

A qualified pension, profit-sharing, 

or stock bonus plan described in 

section 401(a).

A trust described in section 501(c)

(17) that provides for the payment of 

supplemental unemployment 

compensation under certain 

conditions.

A private foundation described in 

section 509(a).

A part of a trust permanently set 

aside or exclusively used for the 

purpose described in section 642(c).

Exceptions. The term “personal 

holding company” does not include 

the following corporations, even if the 

two requirements above are met.

Tax-exempt corporations.

Banks, domestic building and loan 

associations, and certain lending or 

finance companies.

Life insurance and surety 

companies.

Certain small business investment 

companies operating under the Small 

Business Investment Act of 1958.

Corporations under the jurisdiction 

of the court in a title 11 or similar case.

Foreign corporations.

At-risk, passive activities, and 

earnings stripping rules. A 

corporation that has an activity 

subject to the at-risk or passive 

activity rules or interest expense 

subject to the earnings stripping rules 

(or both) may have deductions and 

losses suspended or limited under 

these rules. As a result, do not use 

deductions and losses limited or 

suspended in any of the PHC 

computations. Treat any prior year 

deductions and losses allowed under 

the at-risk, passive activity, and 

earnings stripping rules as current 

year deductions and losses.

Specific Instructions

Important: To determine if a 

corporation is a PHC, follow the steps 

below to complete Schedule PH and 

the Worksheet, later.

1. Complete Part I. Then, 

complete lines 1 through 5 of the 

Worksheet.

2. Complete Part II and then line 6 

of the Worksheet.

3. Generally, if line 6 of the 

Worksheet is 60% or more and the 

stock ownership requirement (Part IV) 

is met, the corporation must file 

Schedule PH and pay the PHC tax. 

However, see Exceptions above.

4. If the corporation determines 

that it must file Schedule PH and pay 

the PHC tax, it must complete Part III, 

line 26, to figure the amount of the 

PHC tax.

Part I. Undistributed 

Personal Holding 

Company Income

Additions

Line 1. Taxable income before net 

operating loss deduction and special deductions. Enter the amount 

from Form 1120, line 28. If the income 

on line 28 was figured using section 

443(b) (placing the income on an 

annual basis), refigure it without using 

that section.

Line 3. Excess expenses and depreciation. If the corporation earned 

rent or other compensation for the use 

of, or right to use, property and that 

rent or compensation was less than 

the total allowable expenses and 

depreciation, complete Part V in most 

cases and enter the excess on line 3. 

However, if the corporation can 

establish that it meets all three of the 

requirements listed below, it can 

attach a statement instead of 

Dec 21, 2016 Cat. No. 10826K
completing Part V. The statement 

must include:

A list of the deductions, with the 

complete facts, circumstances, and 

arguments supporting them, and

The information required by 

Regulations section 1.545-2(h)(2).

To qualify, the corporation must 

establish that:

The rent or other compensation it 

received was the highest obtainable 

(if none was received, it must show 

that none was obtainable),

The property was held in the course 

of a business carried on for profit, and

There was a reasonable 

expectation that the property's 

operation would result in a profit, or 

that the property was necessary to 

conduct the business.

Deductions

Line 5. Federal and foreign income, war profits, and excess 

profits taxes not deducted in figuring line 1. The corporation can 

deduct:

Federal income taxes accrued 

during the tax year, and

Income, war profits, and excess 

profits taxes accrued (or deemed 

paid) during the tax year to foreign 

countries and U.S. possessions.*

The corporation cannot deduct:

The accumulated earnings tax 

under section 531, or

The PHC tax under section 541.

*The foreign tax credit is not 

allowed against PHC tax. But, as 

described above, the corporation can 

take a deduction for taxes paid to 

foreign countries and U.S. 

possessions even if a credit was 

claimed when figuring the 

corporation's income tax.

Attach a schedule showing the type 

of tax, the tax year, and the amount. 

For more information, see section 

545(b)(1).

Line 6. Contributions. Figure the 

deduction using the limitations under 

sections 170(b)(1)(A), (B), (D), and 

(E), but without sections 170(b)(2) 

and (d)(1). When figuring the 

limitations under section 170(b)(1), 

use taxable income figured with the 

adjustments (other than the 10% 

limitation) provided in sections 170(b)

(2) and (d)(1) and without any 

expenses and depreciation 

disallowed under section 545(b)(6).

Line 7. Net operating loss. Instead 

of the net operating loss deduction 

provided in section 172, a deduction 

is allowed for the net operating loss 

(as defined in section 172(c)) for the 

preceding tax year figured without the 

special dividends-received 

deductions for corporations.

Line 10. Total. Include in the total for 

line 10 any deduction for amounts 

used or irrevocably set aside to pay or 

retire qualified indebtedness under 

section 545(c) (as in effect before 

November 5, 1990). See Regulations 

section 1.545-3. Enter the amount and 

“Section 545(c)” on the dotted line 

next to line 10.

Line 12. Dividends paid after the 

end of the tax year. Generally, the 

corporation can elect to treat 

dividends (other than deficiency 

dividends) paid after the end of the 

year and before the 16th day of the 

4th month following the end of the tax 

year as paid during its tax year. 

However, a corporation with a fiscal 

tax year ending on June 30, or a 

corporation with a short tax year 

ending anytime in June, can elect to 

treat dividends (other than deficiency 

dividends) paid after the end of the 

year and before the 16th day of the 

3rd month following the end of the tax 

year as paid during its tax year. Enter 

these dividends on line 12 but not in 

Part VI.

Part II. Personal Holding 

Company Income

Note. The term “ordinary gross 

income” (used below) means line 3 of 

the Worksheet. The term “adjusted 

ordinary gross income” means line 5 

of the Worksheet.

A corporation may be subject to the 

PHC tax if at least 60% of its adjusted 

ordinary gross income for the tax year 

is PHC income. Use Part II to figure 

the amount of the corporation's PHC 

income. Then, complete line 6 of the 

Worksheet to determine if the 

corporation is a PHC.

Line 14b. Dividends excluded. 

Dividends received by a U.S. 

shareholder (as defined in section 

951(b)) from a controlled foreign 

corporation (as defined in section 

957(a)) are excluded from personal 

holding company income under 

section 543(a)(1)(C). Enter the total 

amount of dividends excluded on 

line 14b.

Line 15b. Amounts excluded. Enter 

the total of interest excluded on 

line 15b. The following interest can be 

excluded from PHC income.

1. Interest constituting rent.

2. Interest on amounts set aside in 

a reserve fund under chapter 533 or 

535 of Title 46, United States Code.

3. Interest received by a broker or 

dealer (within the meaning of section 

3(a)(4) or (5) of the Securities 

Exchange Act of 1934) in connection 

with:

a. Any securities or money market 

instruments held as property 

described in section 1221(a)(1),

b. Margin accounts, or

c. Any financing for a customer 

secured by securities or money 

market instruments.

4. Interest from line 4d of the 

Worksheet.

See sections 543(a)(1) and 543(b)

(2)(C) for more information.

Line 18. Rents. Rents can be 

excluded from PHC income if both of 

the following tests are met.

Test 1. The adjusted income from 

rents (line 18c) is at least 50% of 

adjusted ordinary gross income.

Test 2. The sum of taxable 

distributions (Part VI, line 3) and the 

deduction for dividends paid after the 

end of the tax year (Part I, line 12) is at 

least equal to:

1. The excess, if any, of PHC 

income, over

2. 10% of ordinary gross income.

For this purpose, PHC income 

includes copyright royalties and 

adjusted income from mineral, oil, and 

gas royalties, but does not include the 

amounts from lines 18c and 22.

If both of the above tests are met, 

rents can be excluded from PHC 

income. Do not complete lines 18a 

through 18c.

If the rents cannot be excluded, 

enter rents (as defined in section 

543(b)(3)) on line 18a. Enter the 

amount from line 4a of the Worksheet 

on line 18b and complete line 18c.

See section 543(a)(2) for more 

information.

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Line 19. Mineral, oil, and gas royalties. Mineral, oil, and gas royalties 

can be excluded from PHC income if 

all three of the tests below are met.

Test 1. The adjusted income from 

mineral, oil, and gas royalties 

(line 19c) is at least 50% of adjusted 

ordinary gross income.

Test 2. PHC income is not more 

than 10% of ordinary gross income.

For this purpose, PHC income 

includes copyright royalties and the 

adjusted income from rents, but does 

not include line 19c.

Test 3. The deductions allowable 

under section 162 (other than 

compensation for personal services 

rendered by a shareholder and 

deductions specifically allowable 

under other sections) are at least 15% 

of adjusted ordinary gross income.

If all of the above tests are met, 

mineral, oil, and gas royalties can be 

excluded from PHC income. Do not 

complete lines 19a through 19c.

If mineral, oil, and gas royalties are 

not excluded, enter the total mineral, 

oil, and gas royalties (including 

production payments and overriding 

royalties) on line 19a. Enter the 

amount from line 4b of the Worksheet 

on line 19b and complete line 19c.

Line 20. Copyright royalties. 

Note. For royalties received in 

connection with the licensing of 

computer software, see below.

Copyright royalties can be 

excluded from PHC income if all three 

of the tests below are met.

Test 1. Income from copyright 

royalties is at least 50% of ordinary 

gross income. For this purpose, 

copyright royalties do not include 

royalties received for the use of, or 

right to use, copyrights or interests in 

copyrights on works created in whole 

or in part by any shareholder.

Test 2. PHC income is not more 

than 10% of ordinary gross income.

For this purpose, PHC income 

includes:

The adjusted income from rents 

(line 18c);

The adjusted income from mineral, 

oil, and gas royalties (line 19c); and

Copyright royalties received for the 

use of, or right to use, copyrights on 

works created in whole or in part by 

any shareholder owning more than 

10% of the corporation's stock.

PHC income does not include:

Copyright royalties (other than as 

stated above), or

Dividends from any corporation that 

meets Test 1 above and Test 3 below, 

and in which the corporation owns at 

least 50% (by vote and value) of the 

stock.

Test 3. Total allocable deductions 

allowable under section 162 (other 

than compensation for personal 

services rendered by a shareholder, 

deductions for royalties paid or 

accrued, and deductions specifically 

allowable under other sections) are at 

least 25% of the excess of:

1. Ordinary gross income, over

2. The sum of royalties paid or 

accrued and depreciation for 

copyright royalties.

Royalties received in 

connection with the licensing of 

computer software. Royalties 

received in connection with the 

licensing of computer software can be 

excluded from PHC income if all four 

of the tests below are met.

Test 1. The corporation is 

engaged in the active business of 

developing, manufacturing, or 

producing computer software.

Test 2. The royalties are at least 

50% of ordinary gross income.

Test 3. Total allowable deductions 

under sections 162, 174, and 195 that 

are allocable to the computer software 

business are at least 25% of ordinary 

gross income (or, the average of the 

deductions for the 5 tax years ending 

with the current tax year is at least 

25% of the average ordinary gross 

income for that period).

Test 4. The sum of taxable 

distributions (Part VI, line 3) and the 

deduction for dividends paid after the 

end of the tax year (Part I, line 12) is at 

least equal to the excess, if any, of:

1. PHC income (as defined in 

section 543(d)(5)(B)), over

2. 10% of ordinary gross income.

See section 543(d) for more 

information.

Line 21. Produced film rents. 

Produced film rents can be excluded 

from PHC income if the rents 

constitute at least 50% of ordinary 

gross income. See section 543(a)(5) 

for the definition of produced film 

rents.

Line 22. Compensation received 

for the use of corporation property 

by a 25% or more shareholder. 

This line applies only to a corporation 

with other PHC income in excess of 

10% of ordinary gross income. For 

purposes of this limitation, other PHC 

income is defined in section 543(a)(6)

(C).

Enter on line 22 amounts received 

as compensation for the use of, or 

right to use, tangible property of the 

corporation by or for an individual, 

who at any time during the tax year 

directly or indirectly owned at least 

25% in value of the corporation's 

outstanding stock.

Line 23. Amounts received under 

personal service contracts and 

from their sale. This line applies 

only if the individual who has 

performed, is to perform, or may be 

designated to perform such services 

owned at any time during the tax year 

25% or more in value of the 

corporation's outstanding stock.

Enter amounts received under a 

contract that requires the corporation 

to furnish personal services if any 

person other than the corporation has 

the right to designate the individual 

who is to perform the services (or if 

the individual who is to perform the 

services is designated in the 

contract). Also include amounts 

received from the sale or other 

disposition of such a contract.

Line 26. PHC tax. The tax rate on 

undistributed personal holding 

company income is 20%.

Multiply the amount on Part I, 

line 13, by 20%. Enter the result here 

and on Schedule J (Form 1120), 

line 8, or on the proper line of the 

appropriate tax return.

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Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross 

Income, and the PHC Income Test Keep for Your Records

Before you begin: (see instructions below)

1. Gross income. Insurance companies, other than life insurance companies, see section 543(c) ........ 1

2. Less: Gains from the sale or disposition of capital assets and section 1231(b) property .............. 2 ( )

3. Ordinary gross income. Combine lines 1 and 2. ............................................... 3

4. Adjustments:

a Deductions allocable to rents ............................................... 4a

b Deductions allocable to certain royalties and working interests in oil and gas 

wells ....................................................................

4b

c Deductions allocable to compensation described in section 543(b)(3)(D) ......... 4c

d Certain excluded interest income under section 543(b)(2)(C) ................... 4d

e Total adjustments. Add lines 4a through 4d. ................................................. 4e

5. Adjusted ordinary gross income. Subtract line 4e from line 3 ................................... 5

6. Complete Part II of Schedule PH. Divide Part II, line 25, by line 5 above. Enter the result as a 

percentage .................................................................................

6 %

Important: If line 6 is less than 60%, the corporation is not a PHC. Do not file Schedule PH.

Generally, if line 6 is 60% or more and the stock ownership requirement of section 542(a) is met, the corporation is a PHC. 

Complete Parts III and IV. For details and exceptions, see Who Must File and Personal Holding Company, earlier.

Worksheet Instructions

Line 1. Gross income. Enter gross 

income as defined in section 61 and 

the related regulations.

Line 4. Adjustments. Ordinary 

gross income on line 3 must be 

adjusted as described below. Each 

type of income (rents, royalties, 

income from working interests in oil 

and gas wells, and certain excluded 

rents) is separately adjusted by the 

deductions allocable to it. Enter the 

allocable deductions on lines 4a, 4b, 

and 4c to the extent of the gross 

income (for example, enter 

deductions allocable to royalties on 

line 4b, but do not enter more than the 

gross income from royalties).

Also, in figuring adjusted ordinary 

gross income, certain interest income 

is excluded (see the instructions for 

line 4d below).

Line 4a. Deductions allocable to 

rents. Enter deductions (listed 

below) allocable to rents (as defined 

in section 543(b)(3)).

Depreciation and amortization of 

property (other than certain tangible 

personal property not customarily 

retained by any lessee for more than 3 

years).

Property taxes.

Interest.

Rent.

Line 4b. Deductions allocable to 

certain royalties and working 

interests in oil and gas wells. Enter 

deductions (listed below) allocable to 

mineral, oil, and gas royalties 

(including production payments and 

overriding royalties) and to gross 

income from a working interest in an 

oil or gas well.

Depreciation and amortization.

Depletion.

Property and severance taxes.

Interest.

Rent.

Line 4c. Deductions allocable to 

compensation. Compensation for 

the use of, or right to use, tangible 

personal property manufactured or 

produced by the corporation does not 

count as rents if the corporation is 

engaged in substantial manufacturing 

or production of the same type of 

property during the tax year. Enter 

deductions (listed below) allocable to 

this type of compensation.

Depreciation and amortization of 

property (other than certain tangible 

personal property).

Property taxes.

Interest.

Rent.

Line 4d. Certain excluded 

interest income. Include:

Interest on a direct obligation of the 

United States held for sale by a dealer 

who is making a primary market for 

these obligations, and

Interest on condemnation awards, 

judgments, and tax refunds.

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