1120

Section 280H Limitations for a Personal Service Corporation (PSC)

Agency
IRS
Revision
Rev. December 2011
Fillable fields
45
Pages
2
Official source
IRS form page
Checked
October 21, 2026
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Page 1 of form 1120

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

Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), is used by a PSC that elects to have a tax year other than a calendar year. The About page says the PSC uses it to determine if it meets the minimum distribution requirement for the tax year, or to figure the limits on deductions if the requirement is not met.

The instructions explain that a PSC making a section 444 election is subject to the minimum distribution requirement of section 280H for the election year and each tax year the election remains in effect. If it does not meet the requirement, its deduction for amounts paid or incurred to employee-owners is limited.

Part I tests the requirement and Part II figures the maximum deductible amount. The instructions are printed on page 2 of the PDF. You can fill out the PDF free in your browser on this page and download it without an account.

What's on Schedule H (Form 1120)

Header and note

The PSC's name and employer identification number, and a note about newly organized PSCs and corporations that become PSCs.

Part I, lines 1 to 4

The preceding year test: applicable amounts from the preceding tax year, the deferral period percentage, and applicable amounts from the deferral period of the election year.

Part I, lines 5 to 12

The 3-year average test: applicable amounts and adjusted taxable income for each of the 3 tax years before the election year.

Line 13

The minimum distribution requirement, the smaller of line 3 or line 12, compared with line 4.

Part II, lines 14 to 18

Deferral and nondeferral period figures used to spread the deferral period amount over the rest of the tax year.

Line 19

The maximum deductible amount for applicable amounts paid or incurred to employee-owners.

How to fill out Schedule H (Form 1120)

  1. 1

    Line 1

    Enter the applicable amount paid or incurred in the preceding tax year to any employee-owner of the PSC that was otherwise deductible on the PSC's preceding income tax return.

  2. 2

    Lines 2 to 4

    Line 2 divides the months in the preceding year's deferral period by the months in that year. Line 3 multiplies line 1 by it. If line 4 is not less than line 3, the form says to stop.

  3. 3

    Lines 5 to 12

    Enter applicable amounts and adjusted taxable income for the 3 tax years before the election year. Line 10 is the smaller of line 9 or 95%. Line 12 multiplies line 11 by line 10.

  4. 4

    Line 13

    Enter the smaller of line 3 or line 12. If line 13 is equal to or less than line 4, the form says the PSC has met the requirement and Part II is not completed.

  5. 5

    Lines 14 to 18

    Copy line 4 to line 14 and divide it by the months in the deferral period. Multiply the result by the months in the nondeferral period on line 17.

  6. 6

    Line 19

    Add lines 14 and 18. The form says the deduction for applicable amounts paid or incurred to employee-owners is limited to this amount.

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Where it goes and key terms

Attach to the return

The form says to attach Schedule H to the PSC's income tax return if Part II is completed.

Keep with records

When the PSC meets the minimum distribution requirement, the form says not to attach Schedule H and to keep it with the PSC's tax records.

Disallowed amounts

Line 19 says any amount not allowed because of the section 280H(d) limitation is treated as paid or incurred in the PSC's succeeding tax year.

Deferral period

The instructions define it as the months between the last day of the elected tax year and the last day of the required tax year. A September 30 year end gives 3 months.

Employee-owner

The instructions say this is a person who is an employee of the PSC or performs services for it, including an independent contractor, and owns any outstanding stock of the PSC.

Not applicable amounts

The instructions say dividends paid by the corporation and gain on the sale or exchange of property between the owner-employee and the corporation are not applicable amounts.

Related forms

Who completes Schedule H (Form 1120)?

  • PSCs with a section 444 election

    The instructions say a personal service corporation that has elected under section 444 to have a tax year other than a calendar year completes Schedule H.

  • PSCs that miss the requirement

    If the PSC does not meet the minimum distribution requirement of section 280H, the instructions say it files Schedule H with its Form 1120.

  • PSCs that meet the requirement

    The instructions say a PSC that meets the requirement does not need to attach the completed Schedule H, but should keep it with its tax records.

  • Newly organized PSCs

    The form says a newly organized PSC is considered to have met the section 280H distribution requirements for its first year and does not have to complete Schedule H.

  • Corporations that become PSCs

    If an existing corporation becomes a PSC during the tax year and makes a section 444 election, the form says it is treated as a PSC for the 3 preceding tax years.

The schedule is completed by a corporation, not by an individual. It goes with the PSC's income tax return or stays in its records.

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Questions about Form 1120

Does every PSC attach Schedule H?

No. The instructions say a PSC with a section 444 election completes it, but attaches it to Form 1120 only when it does not meet the minimum distribution requirement.

What is the minimum distribution requirement?

The instructions say the PSC meets it if applicable amounts for all employee-owners during the deferral period equal or exceed the smaller of the preceding year test or the 3-year average test.

What is an applicable amount?

The instructions say it is any amount otherwise deductible by a PSC in a tax year that is includible, directly or indirectly, in the gross income of an employee-owner during that year.

What happens to amounts over the limit?

Line 19 says any amount not allowed because of the section 280H(d) limitation is treated as paid or incurred in the PSC's succeeding tax year.

Can estimates be used for adjusted taxable income?

For the deferral period of an applicable election year, the instructions say reasonable estimates are acceptable.