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Text File | 1996-11-06 | 4KB | 81 lines

@046 CHAP ZZ

        ┌───────────────────────────────────────────────┐
        │         PERSONAL SERVICE CORPORATIONS         │
        │  AND QUALIFIED PERSONAL SERVICE CORPORATIONS  │
        └───────────────────────────────────────────────┘

A "personal service corporation" under today's tax laws
is a regular corporation that is principally engaged in
providing 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 passive
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 determining
whether a C corporation will be allowed to use a fiscal
year end for tax purposes.  A corporation that is considered
to be a "personal service corporation" under this second
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 "personal
service corporations" under either of these two definitions
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
"QUALIFIED personal service corporation" ("QPSC") is
one that performs services (which are substantially all of
its activities) in the fields of health, law, engineering,
architecture, 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 a corporation is considered
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 corporate
tax rate, currently 35%.  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 unlikely to be considered
@IF160xx]a "personal service corporation" or "qualified personal
@IF160xx]service corporation," since its primary business activity
@IF160xx]is:  @BUSTYPE.
@IF160xx]----------------------------------------------------------
@IF161xx]NOTE REGARDING @NAME:
@IF161xx]----------------------------------------------------------
@IF161xx]Your firm is a C corporation, and could possibly be deemed
@IF161xx]a "personal service corporation" or "qualified personal
@IF161xx]service corporation," since its primary business activity
@IF161xx]is:  @BUSTYPE.
@IF161xx]
@IF161xx]SUGGESTION:  Consult a skilled tax professional if you are
@IF161xx]not already sure whether or not your corporation is a
@IF161xx]"personal service corporation" (or "QPSC"), since such
@IF161xx]status can have significant (usually dire) tax consequences.
@IF161xx]----------------------------------------------------------
@IF110xx]NOTE REGARDING @NAME:
@IF110xx]----------------------------------------------------------
@IF110xx]Your firm is a C corporation, and could possibly be
@IF110xx]considered a "personal service corporation" or "qualified
@IF110xx]personal service corporation," depending on the nature of
@IF110xx]its business activities and its stock ownership.
@IF110xx]----------------------------------------------------------