Printable Form 2026

IRS Form 1120 (Schedule H) – Section 280H Limitations for a Personal Service Corporation (PSC)

IRS Form 1120 (Schedule H)  – In the complex world of corporate taxation, Personal Service Corporations (PSCs) face unique rules designed to prevent tax deferral advantages. One key component is IRS Form 1120 Schedule H, which addresses limitations under Section 280H of the Internal Revenue Code. This schedule ensures that PSCs with non-calendar tax years meet minimum distribution requirements for payments to employee-owners. If you’re managing a PSC, understanding Schedule H is crucial for compliance and optimizing deductions. This article breaks down the form’s purpose, requirements, and completion process using official IRS guidance.

What Is a Personal Service Corporation (PSC)?

A Personal Service Corporation is a specific type of corporation defined under IRC Section 269A(b)(1). It applies when the principal activity involves performing services in fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. These services must be substantially performed by employee-owners who own more than 10% of the corporation’s stock. PSCs often elect fiscal years other than the calendar year under Section 444 to align with their business cycles, but this triggers Section 280H rules to limit deferral of income taxes.

Purpose of IRS Form 1120 Schedule H

Schedule H (Form 1120) is used by PSCs to determine compliance with the minimum distribution requirement under Section 280H(c). This requirement applies when a PSC elects a non-calendar tax year via Section 444. The form helps:

  • Calculate if sufficient “applicable amounts” (like compensation) were paid to employee-owners during the deferral period.
  • Figure the maximum deductible amount for such payments if the minimum isn’t met, under Section 280H(d).

Without meeting these rules, deductions for employee-owner compensation may be limited, treating excess amounts as paid in the next tax year. The form ensures PSCs don’t unduly defer tax liabilities by shifting income recognition.

Who Must File Schedule H?

Not all PSCs need to complete Schedule H. It’s required for:

  • Existing PSCs that elect under Section 444 to use a tax year other than the calendar year.
  • PSCs in any year the Section 444 election remains in effect, to verify the minimum distribution requirement.

Exceptions include:

  • Newly organized PSCs in their first tax year, which are deemed to meet the requirements.
  • PSCs that meet the minimum distribution and don’t need to limit deductions—keep the completed schedule with tax records but don’t attach it to Form 1120.

If the PSC joins a tiered structure, ceases to be a PSC, or terminates the election, special rules apply under Temporary Regulations Section 1.444-1T(a)(5).

Key Definitions for Section 280H Limitations

Understanding these terms is essential for accurate completion:

  • Applicable Election Year: The tax year in which the Section 444 election is active.
  • Applicable Amount: Deductible payments (e.g., compensation) includible in an employee-owner’s gross income, directly or indirectly. Excludes dividends and certain property transaction gains.
  • Employee-Owner: Any employee or service provider (including independent contractors) who owns PSC stock on any day of the tax year.
  • Deferral Period: Months between the end of the elected tax year and December 31 (e.g., 3 months for a September 30 year-end).
  • Nondeferral Period: The remaining months in the tax year after the deferral period.
  • Adjusted Taxable Income: Taxable income excluding applicable amounts and related NOL carryovers. Use estimates for deferral periods.

These definitions come from Temporary Regulations under Section 1.280H-1T.

How to Complete Part I: Minimum Distribution Requirement?

Part I checks if applicable amounts paid during the deferral period meet or exceed the minimum, using either the preceding year test or the 3-year average test. Here’s a step-by-step guide:

  1. Line 1: Enter applicable amounts from the preceding tax year.
  2. Line 2: Calculate the percentage of months in the prior year’s deferral period divided by total months in that year.
  3. Line 3: Multiply Line 1 by Line 2 (preceding year test).
  4. Line 4: Enter applicable amounts from the current deferral period. If ≥ Line 3, stop—requirement met.
  5. Lines 5a–5c: Enter applicable amounts from the three prior tax years; sum on Line 6.
  6. Lines 7a–7c: Enter adjusted taxable income for those years; sum on Line 8.
  7. Line 9: Divide Line 6 by Line 8 (as a percentage).
  8. Line 10: Enter the smaller of Line 9 or 95%.
  9. Line 11: Enter adjusted taxable income for the current deferral period.
  10. Line 12: Multiply Line 11 by Line 10 (3-year average test).
  11. Line 13: Enter the smaller of Line 3 or Line 12. If ≤ Line 4, requirement met; otherwise, proceed to Part II.

For accrual-basis PSCs, include compensation deductible in the year and includible in the employee’s income.

How to Complete Part II: Maximum Deductible Amount?

If Part I shows the minimum isn’t met, Part II calculates the deduction limit:

  1. Line 14: Enter amount from Line 4.
  2. Line 15: Enter months in the current deferral period.
  3. Line 16: Divide Line 14 by Line 15.
  4. Line 17: Subtract deferral months from total tax year months.
  5. Line 18: Multiply Line 16 by Line 17.
  6. Line 19: Add Lines 14 and 18—this is the maximum deductible amount. Excess is carried over to the next year.

Attach the completed Schedule H to Form 1120 in this case.

Filing Requirements and Tips for PSCs

  • Attachment: Only attach to Form 1120 if deductions are limited; otherwise, retain with records.
  • Election Impact: The Section 444 election subjects the PSC to these rules annually.
  • Common Fields: PSCs in professional services like law or medicine often use this for fiscal year alignment.
  • Updates: As of 2025, refer to the Instructions for Form 1120 for cross-references to Schedule H.

For the latest form, download the PDF from the IRS website: https://www.irs.gov/pub/irs-pdf/f1120sh.pdf.

Conclusion: Ensuring Compliance with Section 280H

Navigating IRS Form 1120 Schedule H is vital for PSCs to avoid deduction limitations and maintain tax efficiency. By meeting the minimum distribution requirement, you can fully deduct applicable amounts without restrictions. Always consult a tax professional for personalized advice, as rules under Temporary Regulations Section 1.280H-1T provide detailed examples. Staying updated with IRS guidelines ensures smooth filing for your Personal Service Corporation.