SCHEDULE H

(Form 1120)

Section 280H Limitations for a Personal Service

Corporation (PSC)

OMB No. 1545-0123

Department of the Treasury

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

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).

Name Employer identification number

Minimum Distribution Requirement (see instructions)

1 Enter applicable amounts from preceding tax year 1

2 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 2 %

3 Amount figured under preceding year test. Multiply line 1 by the percentage on line 2 3

4 Enter applicable amounts from the deferral period of the applicable election year 4

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.

5 Enter applicable amounts from the:

a 1st tax year before applicable election year 5a

b 2nd tax year before applicable election year 5b

c 3rd tax year before applicable election year 5c

6 Total. Add lines 5a through 5c 6

7 Enter adjusted taxable income for the:

a 1st tax year before applicable election year 7a

b 7b

c 3rd tax year before applicable election year 7c

8 Total. Add lines 7a through 7c 8

9 Divide line 6 by line 8 9 %

10 Enter the percentage from line 9 or 95%, whichever is smaller 10 %

11 Enter adjusted taxable income for the deferral period of the applicable election year 11

12 Amount figured under 3-year average test. Multiply line 11 by line 10 12

13 Minimum distribution requirement. Enter the smaller of line 3 or line 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.

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

Divide line 14 by line 15 16 16

Nondeferral period. Subtract the number of months in the deferral period from the number of

months in the applicable tax year. Enter the result

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17

18 Multiply line 16 by line 17 18

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

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For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for Forms 1120 and 1120-A. Schedule H (Form 1120) 2005

Part I

Part II

2nd tax year before applicable election year

Cat. No. 14491P

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2005
Schedule H (Form 1120) 2005 Page 2

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.

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.

Exception. Dividends paid by the

corporation and gain on the sale or

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: 

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.

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).

Part I

Complete Part I to see if the PSC

meets the minimum distribution

● 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.

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.

Instructions

Section references are to the

Internal Revenue Code unless

otherwise noted.

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.

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).

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.

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.

Printed on recycled paper

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, 2004.

On October 1, 2004, S, an employee

of PEK, owned no stock of PEK;

however, on March 31, 2005, S

acquired 10 of the 200 outstanding

shares of PEK stock. During the

period October 1, 2004, to

March 31, 2005, S earned $40,000

of compensation as an employee of

PEK. During the period April 1,

2005, to September 30, 2005, 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, 2005, was otherwise

deductible by PEK and includible in

S’s gross income. In 2005, it is an

applicable amount for PEK from the

preceding tax year.

exchange of property between the

owner-employee and the corporation

are not applicable amounts.

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:

● Owns any outstanding stock of

the PSC.

● Is an employee of the PSC or who

performs services for or on behalf of

the PSC (including an independent

contractor) and