Question

Your boss, Jane Smith, has a meeting with a new client. The client is considering starting a personal service corporation (PCS) but has some questions, one of which is whether to use a calendar year-end or fiscal year-end. It’s been a while since your boss as handled a PSC tax matter. She wants a brief, but thorough, memo on the business purpose exception to selection of a fiscal year-end.

Complete the attached Memorandum based on your research.Support your research with proper citations of tax authority. Your homework should be typed, in Word, and no more than 3 pages long.

Partial list of research aids:

IRC §441(i) and corresponding regulations

MEMORANDUM

To: Jane Smith, Partner

From: [Your Name]

Subject: PSC Business Purpose Exception to Fiscal Year

Facts:

A personal service corporation (PSC) generally is limited to the calendar year for reporting purposes. One exception to this rule is when the PSC can demonstrate a business purpose for a fiscal year-end.

Issue:

Explain the business purpose exception to a PSC using a fiscal year-end, including use of examples of when the standard is and is not satisfied.

Analysis:

[Provide analysis]

Answer 1

Solution:-

Analysis:-

Per my understanding, corporations do have different tax years from their shareholders, but PSC as well as S Corporation is subject to restriction, meaning they have to use the fiscal years. There is an exception such as using the cash method, generally, corporations cannot use the cash method as an accounting tool but PSC's can do so if they met the standards. For example, under section 444, corporation has to demonstrate a business purpose for the year as well as corporation pays the shareholder employee’s not more than three months income salary during the portion of the calendar year after the close of the fiscal year and the salary for that period is at least proportionate to the shareholder employee’s salary received for the preceding fiscal year (Hoffman, Maloney, Raabe, & Willis, 2015). For example, if you are one of the shareholder and your corporation paid you a $100,000 salary during the fiscal year of September 30, 2015, then this does not satisfied the business purpose test, since it is a hole some. But if the corporation provides information that you received a $25,000 salary (basically more of a quarterly payments of $25,000; $100,000 x 3 months / 12 months) during the period of October to December, then you are satisfied for the business purpose exception.