Contact UsDoes A Qualified Personal Service Corporations Must Pay At The 35% Tax Rate?
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Brett Thompson, JD, CPA
Not necessarily.
The Internal Revenue Code imposes a different tax rate on these……”, on the taxable income of a qualified personal service corporation … equal to 35 percent of the taxable income.” One technique to avoid this tax rate is for the compensation be paid, and deducted, in an amount to force taxable income to zero. A court ruled against this practice recently.
Regulations define such a company as one where the professional is an employee and owns less than 95% of the company, then the company is no longer a qualified personal service corporation. Thus, if another professional owns 6% or more of the company, but is not an employee, then the company no longer qualifies. Interestingly, the regulation does not impute stock ownership from one spouse to another.
Ethically, if an employee-professional dies, then to achieve a smooth transition for clients, a professional corporation should have another professional who can take over as an owner. Also, this will help to retain the value of the business because of the death of a single employee-professional.
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309 weeks ago
The Internal Revenue Code imposes a different tax rate on these……”, on the taxable income of a qualified personal service corporation … equal to 35 percent of the taxable income.” One technique to avoid this tax rate is for the compensation be paid, and deducted, in an amount to force taxable income to zero. A court ruled against this practice recently.
Regulations define such a company as one where the professional is an employee and owns less than 95% of the company, then the company is no longer a qualified personal service corporation. Thus, if another professional owns 6% or more of the company, but is not an employee, then the company no longer qualifies. Interestingly, the regulation does not impute stock ownership from one spouse to another.
Ethically, if an employee-professional dies, then to achieve a smooth transition for clients, a professional corporation should have another professional who can take over as an owner. Also, this will help to retain the value of the business because of the death of a single employee-professional.