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) for details.

Name Employer identification number

Minimum Distribution Requirement Under Section 280H(c) (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 tax return, but keep it with the PSC’s

tax records.

5 Enter applicable amounts from:

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, 5b, and 5c 6

7 Enter PSC’s adjusted taxable income (see instructions):

a For 1st tax year before applicable election year 7a

b 7b

c For 3rd tax year before applicable election year 7c

8 Total. Add lines 7a, 7b, and 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 Under Section 280H(d) (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 Paperwork Reduction Act Notice, see the Instructions for Forms 1120 and 1120-A. Schedule H (Form 1120) (1997)

Part I

Part II

For 2nd tax year before applicable election year

Cat. No. 14491P

97
Schedule H (Form 1120) (1997) 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

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 it 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 year,

is an employee of the PSC or who

performs services for or on behalf of

the PSC (including an independent

contractor), and

● On any day of the PSC’s tax year,

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.

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

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.

Use lines 1 through 4 to see if the

preceding year test applies to the

PSC. If it doesn’t, complete the rest

of Part I to see if the 3-year average

test applies.

Part II

Use Part II to figure the maximum

deduction 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 any

taxpayer who is an employee-owner

during that year. Temporary

Regulations section

1.280H-1T(b)(4)(iii) contains

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.