§280H Limitation on Certain Amounts Paid to Employee-owners by Personal Service Corporations Electing Alternative Taxable Years

Summary

If a personal service corporation has chosen the special tax year under section 444 and it does not make the required minimum distributions for that year, the company can only deduct a limited amount for pay and similar payments to employee-owners. Any part that is not allowed as a deduction can be carried forward and treated as paid in the next year. Also, no net operating loss carrybacks are allowed to or from a year when the section 444 election applies. The minimum distribution test says the company must pay into the deferral period either the smaller of two amounts: (1) a prorated amount based on what it paid in the prior year (calculated by months), or (2) a percentage of its adjusted taxable income for the deferral period. That percentage is the ratio of applicable payments to adjusted taxable income for the three prior taxable years, but it cannot be more than 95 percent. The maximum deductible amount equals what was paid in the deferral period plus a prorated amount covering the nondeferral period. “Applicable amount” means payments to an employee-owner that the employee must include in income (not sale gains or dividends). “Employee-owner,” “deferral period,” “adjusted taxable income,” and “personal service corporation” are defined by other tax rules.