26 U.S.C. § 280H — Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years

(a) General rule. If (1) a personal service corporation elected an alternative tax year under section 444, and (2) it does not meet the minimum distribution requirement in (c) for that year, then its deduction for "applicable amounts" paid to employee-owners cannot exceed the "maximum deductible amount" defined in (d). This limit does not apply to personal holding companies under subchapter G. (b) Carryover of nondeductible amounts. Any amount disallowed as a deduction under (a) is treated as paid in the next tax year instead. (c) Minimum distribution requirement. (1) In general. The corporation meets this requirement if the amounts it paid employee-owners during the year's "deferral period" (ignoring the carryover rule in (b)) are at least the smaller of two numbers, worked out step by step: - Number one: take last year's applicable amounts paid. Divide by the number of months in last year. Multiply that by the number of months in last year's deferral period. - Number two: multiply the year's "adjusted taxable income" for the deferral period by the "applicable percentage." (2) Applicable percentage. Work this out in steps too: add up the applicable amounts paid over the past three tax years. Add up the adjusted taxable income for those same three years. Divide the first total by the second. That is the applicable percentage — but it can never be set higher than 95 percent. (d) Maximum deductible amount. Work this out in steps: start with the applicable amounts paid during the deferral period. Divide that number by the number of months in the deferral period. Multiply the result by the number of months in the "nondeferral period." Add that to the original deferral-period amount. The total is the maximum deductible amount. (e) Disallowance of net operating loss carrybacks. A personal service corporation using a section 444 election cannot carry a net operating loss back to, or from, any other tax year. (f) Other definitions and special rules. (1) "Applicable amount" means any amount paid to an employee-owner that counts as that employee's taxable income — except gains from selling property to the corporation, or dividends the corporation pays. (2) "Employee-owner" has the meaning given in section 269A(b)(2), as adjusted by section 441(i)(2). (3) "Deferral period" has the meaning in section 444(b)(4); the "nondeferral period" is the rest of the tax year, after the deferral period ends. (4) "Adjusted taxable income" means taxable income, ignoring (A) amounts paid to employee-owners that count as their income, and (B) any net operating loss carryover tied to those amounts. (5) "Personal service corporation" has the meaning given in section 441(i)(2).