S-Corp and "PSC"

[NSNM]

A medical doctor practicing medicine in his 100% owned C-corporation is required to check the box "PSC" (Personal Service Corporation) on Form 1120, and subject to higher flat rate of 35% tax on net taxable income.

Is it legally possible for him to practice by forming an S-corporation (Form 1120S) in place of C-corp and shift S-Corp income to his individual Income Tax Return and pay regular lower rate of tax ? What are the consequences ?

Does computer consultant fall under the provision of "Personal Service Corporation"

Any reply appreciated.

Reference: The TaxBook - 2007 Tax Year, Page 18-14

[Roland Slugg]

Dear NSNM

First of all, you don't "form" an S Corp. You form a corporation, then make the S Corp election for tax purposes, or if you already have a corporation, you make the S Corp election for it.

There is little to be gained by doing this, however, as the MD can ... and IMO should ... already be zeroing-out his corporation's profits every year by paying himself accordingly.

A computer consultant's corporation probably meets the definition of a PSC. See Code §448(d)(2)

[ChEAr$]

Yes, this can be done

Elect S corp status, and profits will not be overtaxed, since an S is not subject to the
PSC rules.

Several years ago my S corporation had a letter from IRS informing me that profits should
be taxed at higher rate, and a whole bunch of these went out erroneously. IRS was
informed of the error of it's ways.

However things have changed now for a C corp, since dividends are taxed at capital
gains rates, and dividends paid reduced the amount subject to the max tax, so it's easy
to zero it out. Make it go away. Thus keep the C status with all the other benefits and
perks.

[Roland Slugg]

However things have changed now for a C corp, since dividends are taxed at capital gains rates, and dividends paid reduced the amount subject to the max tax, so it's easy to zero it out.

That's not true. Dividends are NOT deductible by a C Corp in determining its taxable income.

[Uncle Sam]

S Corp/PSC

Make sure that on the conversion - you might have built-in gains taxes to consider on appreciated assets.

[ChEAr$]

Let me rephrase that then,

That's not true. Dividends are NOT deductible by a C Corp in determining its taxable income.

for my point didn't make it. Dividends are deductible if timely paid when computing
the extra PSC tax. See the form.

[JohnH]

Another question on the PSC issue, with a slight twist. If it's a C-Corporation and otherwise comes under the PSC rules, can issuing 5% or more of the stock to the sole shareholder's spouse solve the PSC problem? (This is assuming that the spouse is qualified to be a shareholder and doesn't work for the corp nor has ever worked for the corp).

[ChEAr$]

Another question on the PSC issue, with a slight twist. If it's a C-Corporation and otherwise comes under the PSC rules, can issuing 5% or more of the stock to the sole shareholder's spouse solve the PSC problem? (This is assuming that the spouse is qualified to be a shareholder and doesn't work for the corp nor has ever worked for the corp).

I don't think that'll get off the ground, John. For details see publication 542 on corporations and the definitions of PSC.