Question

On page 16-12, the text states that corporations (other than S corporations) are generally prohibited from using the cash method of accounting, but that there is an exception for “qualified personal service corporations.” The text states that a qualified personal service corporation is one that performs services in the fields of “health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting” and whose employees own substantially all of the stock of the corporation.

• Are there any other fields in which a qualified personal service corporation may provide services? If so, please list them.
• What is the test for determining if a qualified personal service corporation meets the stock ownership requirement? Describe in detail.
• What are the consequences of a corporation failing to meet the criteria as a qualified personal service corporation for a taxable year?

Answer 1

Ans.(1) Other fields in which a qualified personal service corporation provides services are:

• Athletics
• Veterinary services.
• Financial services
• Brokerage services
• Trading in securities or commodities
• Partnership interests

Ans.(2): Personal Service Corporation Test determining if a qualified personal service corporation meets the stock ownership requirements has following conditions:

Minimum 95% of organisational stock is acquired by

• Current employees of the the organisation those are performing services
• Retired employee of the corporation
• Someone who acquires the organisational stock after the death of the employee and retiree. But the maximum time period to do so is 2 years from the death of the employee or retiree.

Ans.(3): Consequences for failure to meet the criteria for qualify Personal Service Corporation Test (PSC Test)are:

• Tax withholding requirements should match with respect to qualify stock for personal service corporation test. If the criteria is not matched it becomes the reason for failure.
• An organisation has more than $5 million average gross receipts and deals with sails business, fails to meet the criteria for qualify as PSC.
• If an owner is failed in 95% ownership test to avoid 35% tax rate that is imposed by Internal Revenue Code (IRC).