§280H Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years

Summary

Personal service corporations that pick an alternative tax year under section 444 must pay enough to their employee-owners during the deferral months. If they do not meet that minimum test, the payments that are not allowed as a deduction for that year are treated as paid in the next taxable year. The payments during the deferral period must be at least the smaller of two amounts: (1) a prorated amount based on what was paid in the prior year, or (2) an “applicable percentage” of the corporation’s adjusted taxable income for the deferral period. The applicable percentage is the ratio of applicable payments to adjusted taxable income over the three prior years, but it cannot exceed 95 percent. The “maximum deductible amount” equals the payments in the deferral period plus a prorated amount that covers the nondeferral months. No net operating loss carrybacks are allowed to or from years covered by a section 444 election. The law uses these short definitions: “applicable amount” = payments to an employee-owner that are taxable to that employee (not sale gains between owner and corporation or dividends); “employee-owner,” “deferral period,” and “personal service corporation” are defined by other tax rules; “nondeferral period” = the rest of the year after the deferral months; “adjusted taxable income” = taxable income excluding amounts paid to employee-owners and any NOL carryovers tied to those payments.