§280H — Title 26 Internal Revenue Code | U.S. Code

Summary

If a personal service corporation picks the special tax-year rule under section 444 but does not pay enough to its owner-employees during the deferral part of that year, the company cannot deduct those shortfall amounts that year. Any amount denied as a deduction is treated as paid in the next tax year. To avoid denial, the payments in the deferral period must be at least the smaller of two numbers: a prorated amount based on the prior year’s payments, or a percentage of the company’s adjusted taxable income for the deferral period. That percentage is figured from the last 3 years and can never be more than 95 percent. The law also sets a “maximum deductible amount” that adds the deferral-period payments plus a prorated amount for the rest of the year. No net operating loss carrybacks are allowed to or from years with the section 444 election. Applicable amount: payments to an employee-owner that are included in the employee’s income (excludes sale gains and dividends). Employee-owner: an owner who is also an employee, as defined in the tax code. Deferral period: the delayed part of the tax year under section 444. Nondeferral period: the rest of the tax year. Adjusted taxable income: taxable income without counting payments to employee-owners or related loss carryovers. Personal service corporation: the kind of company defined under the tax code.

Title 26, §280H

Internal Revenue Code — Source: USLM XML via OLRC

(a)If—

(1)an election by a personal service corporation under section 444 is in effect for a taxable year, and

(2)such corporation does not meet the minimum distribution requirements of subsection (c) for such taxable year,

(b)If any amount is not allowed as a deduction for a taxable year under subsection (a), such amount shall be treated as paid or incurred in the succeeding taxable year.

(c)For purposes of this section—

(1)A personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period of the taxable year (determined without regard to subsection (b)) equal or exceed the lesser of—

(A)the product of—

(i)the applicable amounts paid during the preceding taxable year, divided by the number of months in such taxable year, multiplied by

(ii)the number of months in the deferral period of the preceding taxable year, or

(B)the applicable percentage of the adjusted taxable income for the deferral period of the taxable year.

(2)The term “applicable percentage” means the percentage (not in excess of 95 percent) determined by dividing—

(A)the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by

(B)the adjusted taxable income of such corporation for such 3 taxable years.

(d)For purposes of this section, the term “maximum deductible amount” means the sum of—

(1)the applicable amounts paid during the deferral period, plus

(2)an amount equal to the product of—

(A)the amount determined under paragraph (1), divided by the number of months in the deferral period, multiplied by

(B)the number of months in the nondeferral period.

(e)No net operating loss carryback shall be allowed to (or from) any taxable year of a personal service corporation to which an election under section 444 applies.

(f)For purposes of this section—

(1)The term “applicable amount” means any amount paid to an employee-owner which is includible in the gross income of such employee, other than—

(A)any gain from the sale or exchange of property between the owner-employee and the corporation, or

(B)any dividend paid by the corporation.

(2)The term “employee-owner” has the meaning given such term by section 269A(b)(2) (as modified by section 441(i)(2)).

(3)(A)The term “deferral period” has the meaning given to such term by section 444(b)(4).

(B)The term “nondeferral period” means the portion of the taxable year of the personal service corporation which occurs after the portion of such year constituting the deferral period.

(4)The term “adjusted taxable income” means taxable income determined without regard to—

(A)any amount paid to an employee-owner which is includible in the gross income of such employee-owner, and

(B)any net operating loss carryover to the extent such carryover is attributable to amounts described in subparagraph (A).

(5)The term “personal service corporation” has the meaning given to such term by section 441(i)(2).

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Subsecs. (c)(1)(A)(i), (d)(1). Pub. L. 100–647, § 2004(e)(14)(C), substituted “amounts paid” for “amounts paid or incurred”. Subsec. (f)(2). Pub. L. 100–647, § 2004(e)(3), substituted “section 269A(b)(2) (as modified by section 441(i)(2))” for “section 296A(b)(2)”. Subsec. (f)(4). Pub. L. 100–647, § 2004(e)(14)(A), amended par. (4) generally. Prior to amendment, par. (4) read as follows: “The term ‘adjusted taxable income’ means taxable income increased by any amount paid or incurred to an employee-owner which was includible in the gross income of such employee-owner.” Subsec. (f)(5). Pub. L. 100–647, § 2004(e)(2)(B), added par. (5).

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1986, see section 10206(d)(1) of Pub. L. 100–203, set out as a note under section 444 of this title.

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

Summary

Title 26, §280H

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Citations & Metadata