September 11, 2015
Personal Service Corporations
Personal Service Corporations
WHAT IS A PSC?
A corporation is a qualified Personal Service Corporation (PSC) if:
At least 95% of the value of its stock is held by:
- Employees
- Retired employees
- Estates of employees and retired employees, and
- Any person who acquired the stock of the employee or retired employee but only for the two-year period beginning on the date of death, AND
Its employees perform services at least 95% of the time in any of the following fields:
- Health
- Law
- Engineering
- Architecture
- Accounting
- Actuarial science
- Performing arts, or
- Consulting. (Code Sec. 11(b)(2); Code Sec. 448(d)(2))
TAX RATES FOR A PSC
Qualified PSCs are taxed at a flat 35% rate on their taxable income. (Code Sec. 11(b)(2))
REGULAR CORPORATE RATES DON’T APPLY
The IRS has found, however, that many qualified personal service corporations are using the graduated corporate rate structure that applies generally to corporations. Some practitioners have blamed the problem on computer tax software programs while others claim the mistakes were unintentional oversights.
IRS SURVEILLANCE
The IRS says it is looking closely into this problem and will continue to pursue activities to identify wrongdoers and bring them into compliance. Qualified PSCs that didn’t file using the flat 35% rate are requested to file amended returns promptly to minimize interest assessments.
Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Readers should not take specific action in reliance on this summary without consulting the statute and regulations or seeking advice form a qualified professional.
Information in this material is for general purposes only. You should consult Sechrest & Bloom, LLC at 978-263-7771 for specific recommendations about your particular situation.
This article was supplied or updated on October 4, 2005.
