Internal Revenue Code (Title 26 U.S.C.)
26 U.S.C. § 280H (2024) — Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years
General rule
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, then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to employee-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to personal holding companies).
Carryover of nondeductible amounts
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.
Minimum distribution requirement
For purposes of this section— (1) In general 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) Applicable percentage 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.
Maximum deductible amount
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.
Disallowance of net operating loss carrybacks
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.
Other definitions and special rules
For purposes of this section— (1) Applicable amount 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) Employee-owner The term "employee-owner" has the meaning given such term by section 269A(b)(2) (as modified by section 441(i)(2)). (3) Nondeferral and deferral periods (A) Deferral period The term "deferral period" has the meaning given to such term by section 444(b)(4). (B) Nondeferral period 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) Adjusted taxable income 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) Personal service corporation The term "personal service corporation" has the meaning given to such term by section 441(i)(2).
Source: official text