The IRS considers most professional corporations to also be personal service corporations. If you’re in the medical professional, accounting, legal or engineering, you’re definitely in a professional service. In addition, though, the IRS has recently added actuaries, performing artists, and consulting companies – businesses that generally aren’t required to be professional corporations – to the list.
A qualified personal service C Corporation is subject to a flat tax of 35% and has a lower threshold for accumulated earnings tax than a regular C Corporation. Plus you must have a December 31st year-end. These two factors mean many traditional C Corporation planning techniques just don’t work.
If you think your business might be considered a qualified personal service corporation, you have two options. You can:
- Operate as an S Corporation. The IRS considers the flow-through tax status of an S Corporation to offset the 35 percent rate it would normally levy; or
- Try to fail the IRS qualified personal service company test.
There are two ways to fail the test. One way is to show that less than 95 percent of all employees’ time is spent in personal service company activities. A veterinarian’s office that does animal boarding is one example, as well as a eye doctor who also sells glasses and contact lenses.
The second way to fail the test is to make sure that at least five percent of the corporation’s stock is held by persons who aren’t personally providing the professional service. If you’re lucky enough to be in a state that permits non-licensed spouses to also hold ownership in a professional corporation or professional LLC, this is easy – make sure your spouse (or spouses, if there are multiple owners involved) own five percent or more.
Of course, there are plenty of steps involved to failing the qualified personal service company test. You will want to have an experienced Tax Strategist like we have at USTaxAid Services helping you plan and implement so you pay the least amount of taxes possible.