"Stuart O. Bronstein" <stu[at]lexregia.com> wrote:
- quote -

PSC is an operating corp that provides specified personal
services in its operation (as well as meeting other
technical criteria), a PHC is a corp that usually is acting
as a holding vessel accumulating income for its
shareholder(s) and is taxed at the highest rate unless it
meets a formula for paying out dividends.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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"Stuart O. Bronstein" <stu[at]lexregia.com> wrote:
- quote -

PSC, Personal Service Corporation. Corporation's business is
furnishing personal services performed by owners. The
thresholds for PSC and QPSC status are complex, depending on
which rule governing taxation of PSCs is being applied. PSCs
pay tax at the flat rate and have a lower threshold for
retained earnings tax. There are some benefits to PSC status
involving the tax treatment of fringe benefits and the use
of cash accounting.

PHC, Personal Holding Company. Corporation's business is
collecting portfolio income, rents, royalties, or the like
for the owners. A PHC pays taxes at a still higher flat
rate. This is the status that is important to avoid.

--
Chris Green

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"Dave Woods, EA" <d.woods[at]verizon.net> blurted out
- quote -

I'm too lazy to look this up, but what's the difference
between a PSC and a PHC?

Stu

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jake johnson wrote:

- quote -

Section 11(b)(2) denies the benefit of graduated corporate
rates to qualified personal service corporations.

--
Ed Zollars, CPA
Phoenix, Arizona

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"jake johnson" <jake[at]omnimode.com> wrote:
- quote -

A PSC pays tax at the highest marginal individual rate
without regard to corporate tax brackets. In other words,
it pays a higher corporate income tax than it would if it
were not a PSC.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:

- quote -

Ed,
I'm not completely understanding your answer. How are tax
rates affected by PSC treatment?

Thanks. - Jake

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Beep Beep" <redsweater[at]nc.rr.com> wrote:

- quote -

The 95% test relates to services in the qualified areas
(consulting, law, etc) by any employee, not just owners.
See Reg, 1.448-1T(e)(4)(i). (It also relates to ownership)

As to whether your activities meet the definition of
consulting I do not have sufficient information to say. The
official definition of consulting is (Reg. 1.448-T(e)(iv):

(iv) Meaning of services performed in the field of
consulting

(A) In general.

For purposes of paragraph (e)(4)(i)(H) of this section, the
performance of services in the field of consulting means the
provision of advice and counsel. The performance of services
in the field of consulting does not include the performance
of services other than advice and counsel, such as sales or
brokerage services, or economically similar services. For
purposes of the preceding sentence, the determination of
whether a person's services are sales or brokerage services,
or economically similar services, shall be based on all the
facts and circumstances of that person's business. Such
facts and circumstances include, for example, the manner in
which the taxpayer is compensated for the services provided
(e.g., whether the compensation for the services is
contingent upon the consummation of the transaction that the
services were intended to effect).

....

(B) Examples

....

Example (2)

A taxpayer is in the business of providing services that
consist of determining a client's electronic data processing
needs. The taxpayer will study and examine the client's
business, focusing on the types of data and information
relevant to the client and the needs of the client's
employees for access to this information. The taxpayer will
then make recommendations regarding the design and
implementation of data processing systems intended to meet
the needs of the client. The taxpayer does not, however,
provide the client with additional computer programming
services distinct from the recommendations made by the
taxpayer with respect to the design and implementation of
the client's data processing systems. The taxpayer is
considered to be engaged in the performance of services in
the field of consulting.

--- end quoted text

So do you sell your clients hardware and software? If so
what % are these sales of your total revenue? Do you
perform custom programming?

Drew Edmundson, CPA (NC)
e-mail is my first name at nccpa dot com

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jake johnson wrote:

- quote -

The issue is that Congress "borrowed" those rules (which
were originally a "break" to allow certain large service C
corporations to remain on the cash basis of accounting) to
impose a negative result on small service C
corporations--the denial of the lower corporate tax
brackets. For that reason, an accountant might recommend
against forming as a C corporation for such an entity in
order to avoid being stuck the possibility of having to pay
tax at those rates.

--
Ed Zollars, CPA
Phoenix, Arizona

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"jake johnson" <jake[at]omnimode.com> wrote:
- quote -

Jake, I read this to understand that the S election was made
BECAUSE the corp would have been treated as a PSC otherwise.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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"Beep Beep" <redsweater[at]nc.rr.com> wrote:
[...snip...]
- quote -


I don't believe your accountant would have suggested
formation as an S-Corp for PSC treatment, since only C-Corps
can be considered PSC's. At least, this is what I gather
from §1.448-1T, but I could be wrong. What facet of PSC
treatment are you seeking to take advantage of?

- Jake

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"Beep Beep" <redsweater[at]nc.rr.com> wrote:

- quote -

My recollection is that computer services like you listed
are included in professional services that are used for
QPSC.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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I am a 50% owner and employee of an S-corporation that
provides on-site computer & network repairs, maintenance and
administration. Over 95% of services are performed by the
two owner/employees. We also utilize part-time independent
contractors for sales and service work.

We have currently elected an S-Corp designation, based on
the advice of our accountant when we started two years ago.
One of the main motivating factors for the decision was his
belief that we would be treated as a qualified PSC since we
perform services. Earlier this year, being curious, I
downloaded the pdfs from the IRS website dealing with PSC's
and was surprised to find the occupation limitations for
PSCs (attorneys, doctors, etc.). The only two occupations
listed that I thought we might fall into were engineering or
consulting. Since to be considered an engineer in most if
not all states, you have to be licensed, I didn't think that
we would fall into that even though we contain professional
certifications (not licenses) that contain the word engineer
in the title (specifically, Microsoft Certified Systems
Engineer). Now, on the consulting occupation, it's a bit
more unclear. From searching the history of this group, I've
seen references to computer programmers not being considered
consultants but nothing regarding computer administrators.
It seems the designation hinges on whether we just provide
opinions, recommendations and ideas on how to manage our
clients computers and networks or whether we also *carry
out* the services outlined in our opinions, recommendations
and ideas (which we do, BTW).

From what I've read in the group's history and on the IRS
website, it seems that we wouldn't fall within QPSC
treatment and that a C-corp might be preferable over an
S-corp for us because of the tax brackets that my partner
and I are within (along with its flexibility in providing
alternate income distribution arrangements for shareholders
and its ability to provide deductible employee benefits).

Does this conclusion seem correct based on the information
I've presented here? Have I left out critical information?

If this is correct, I now have doubts about continuing to
use our present accountant. Most of his clients are sole
proprietorships, individuals or general partnerships. He's a
personal friend and customer but if he was not aware of how
QPSC treatment is limited, perhaps he's not aware enough of
corporate tax law and regs to be the best choice for us.

Thanks for any help you can provide. I could be off-base (we
got the same advice about becoming an S-corp from an
attorney when we incorporated) but I don't believe I am at
this point in the game.

Michael

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