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Monster Media 1993 #2
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F233.SBE
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1993-07-01
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@046 CHAP ZZ
┌───────────────────────────────────────────────┐
│ PERSONAL SERVICE CORPORATIONS │
│ AND QUALIFIED PERSONAL SERVICE CORPORATIONS │
└───────────────────────────────────────────────┘
@Q "The words of such an act as the income tax merely
@Q dance before my eyes in a meaningless procession:
@Q cross-reference to cross-reference, exception upon
@Q exception -- couched in abstract terms that offer no
@Q handle to seize hold of -- leave in my mind only a
@Q confused sense of some vitally important, but suc-
@Q cessfully concealed, purport, which it is my duty
@Q to extract, but which is within my power, if at all,
@Q only after the most inordinate expenditure of time.
@Q I know that these monsters are the result of fabul-
@Q ous industry and ingenuity, plugging up this hole
@Q and casting that net against all possible evasion;
@Q yet at times I cannot help recalling a saying of
@Q William James' about certain passages of Hegel:
@Q that they were no doubt written with a passion of
@Q rationality but that one cannot help wondering whe-
@Q ther to the reader they have any significance save
@Q that the words are strung together with syntactical
@Q correctness...."
@Q
@Q --Judge Learned Hand, referring to the 1939
@Q Internal Revenue Code, a statute which was
@Q almost childlike in its simplicity when
@Q compared to our current tax law.
A "personal service corporation" under today's tax laws is
a regular corporation that is principally engaged in provi-
ding personal services, where more than 10% of the stock is
owned by its employees. Unlike other C corporations, such
a corporation is fully subject to the limitations on pass-
ive activity losses, in much the same way as an individual.
A second, and somewhat similar definition of a "personal
service corporation" is provided for purposes of determin-
ing whether a C corporation will be allowed to use a fiscal
year end for tax purposes. A corporation that is consid-
ered to be a "personal service corporation" under this sec-
ond definition will not be allowed (generally) to elect a
fiscal tax year (unless it already did so by filing Form
8716 before August 26, 1988). Being categorized as "per-
sonal service corporations" under either of these two def-
initions will almost always prove to be a disadvantage for
tax purposes, rather than an advantage.
Yet another very similar, but not identical, tax concept
is that of the "qualified personal service corporation."
(A corporation may fall under either none, one, two or all
of these 3 definitions of "personal service corporations"
and "qualified personal service corporations.") A "QUALI-
FIED personal service corporation" ("QPSC") is one that
performs services (which are substantially all of its acti-
vities) in the fields of health, law, engineering, architec-
ture, accounting, actuarial sciences, performing arts or
consulting, where substantially all of its stock is owned
by the employees or retired employees (or by the estates
of such persons).
There is a major disadvantage if your corporation is consid-
ered to be a "qualified personal service corporation" -- It
is not permitted to benefit from the lower graduated tax
rates available to other C corporations. Instead, all of
its income is subject to tax at the maximum federal corpor-
ate tax rate, currently 34%. On the other hand, even if
such a corporation has average annual gross receipts of
more than $5 million for the past three years, it will be
allowed to use the cash method of accounting (which can be
advantageous), rather than being required to use accrual
method accounting for tax purposes. Thus, it can sometimes
be a two-edged sword if your C corporation is categorized
as a "qualified personal service corporation," at least for
a large firm.
@IF160xx]NOTE REGARDING @NAME:
@IF160xx]----------------------------------------------------------
@IF160xx]Your firm is a C corporation, but is unlikely to be consid-
@IF160xx]ered a "personal service corporation" or "qualified per-
@IF160xx]sonal service corporation," since its primary business ac-
@IF160xx]tivity is: @BUSTYPE.
@IF160xx]----------------------------------------------------------
@IF161xx]NOTE REGARDING @NAME:
@IF161xx]----------------------------------------------------------
@IF161xx]Your firm is a C corporation, and could possibly be consid-
@IF161xx]ered a "personal service corporation" or "qualified per-
@IF161xx]sonal service corporation," since its primary business ac-
@IF161xx]tivity is: @BUSTYPE.
@IF161xx]
@IF161xx]SUGGESTION: Consult a skilled tax professional if you are
@IF161xx]not already sure whether or not your corporation is a "per-
@IF161xx]sonal service corporation" (or "QPSC"), since such status
@IF161xx]can have significant (usually dire) tax consequences.
@IF161xx]----------------------------------------------------------
@IF110xx]NOTE REGARDING @NAME:
@IF110xx]----------------------------------------------------------
@IF110xx]Your firm is a C corporation, and could possibly be consid-
@IF110xx]ered a "personal service corporation" or "qualified per-
@IF110xx]sonal service corporation," depending on the nature of its
@IF110xx]business activities and its stock ownership.
@IF110xx]----------------------------------------------------------
