Form 1120 Schedule H – Section 280H Limitations for Personal Service Corporations

Last reviewed: 2025‑10‑26

Use the Form 1120sh Tax Form Calculator Form 1120sh as a stand alone tax form calculator to quickly calculate specific amounts for your 2026 1120sh state tax return. Alternatively, you can use one of our Combined Federal and State Tax Estimators to quickly calculate your salary, tax, and take-home pay.

Form 1120 Schedule H is specifically used by Personal Service Corporations (PSCs) to determine if they are subject to limitations on the deductions they can claim under Section 280H of the Internal Revenue Code. These limitations primarily affect highly compensated employee-shareholders in closely held service firms.

Schedule H helps determine the allowable deduction for compensation based on the following criteria:

Qualified PSC Status: The corporation must be classified as a PSC under IRS rules, providing services in fields such as law, health, engineering, or accounting.
Base Period Income: The average taxable income from the prior four tax years is used to establish a baseline.
Deduction Limit: Compensation deductions are capped to prevent income manipulation through inflated payments to shareholder-employees.
Special Adjustment: If the current year’s compensation exceeds the allowable limit, the excess amount must be added back to taxable income.

Section 280H Limitations for a Personal Service Corporation (PSC)
Name		Employer identification number
Note: A newly organized PSC is considered to have met the section 280H distribution requirements for the first year of its existence and does not have to complete Schedule H. If, during the tax year, an existing corporation becomes a PSC and makes a section 444 election, the corporation is treated as if it were a PSC for the 3 preceding tax years. See Temporary Regulations section 1.280H-1T(e).
Part I Minimum Distribution Requirement (see instructions)
1	Enter applicable amounts from preceding tax year	1
2	Divide number of months in deferral period of preceding tax year by number of months in preceding tax year. Enter the result as a percentage	2	%
3	Amount figured under preceding year test. Multiply line 1 by the percentage on line 2	3
4	Enter applicable amounts from the deferral period of the applicable election year	4
4	If line 4 is less than line 3, go to line 5. Otherwise, stop here. The PSC has met the minimum distribution requirement. Do not attach Schedule H to the PSC’s income tax return. Keep Schedule H with the PSC’s tax records.
5	Enter applicable amounts from the:
a	1st tax year before applicable election year	5a
b	2nd tax year before applicable election year	5b
c	3rd tax year before applicable election year	5c
6	Total. Add lines 5a through 5c	6
7	Enter adjusted taxable income for the:
a	1st tax year before applicable election year	7a
b	2nd tax year before applicable election year	7b
c	3rd tax year before applicable election year 1	7c
8	Total. Add lines 7a through 7c	8
9	Divide line 6 by line 8	9	%
10	Enter the percentage from line 9 or %, whichever is smaller	10	%
11	Enter adjusted taxable income for the deferral period of the applicable election year	11
12	Amount figured under 3-year average test. Multiply line 11 by line 10	12
13	Minimum distribution requirement. Enter the smaller of line 3 or line 12	13
13	• If line 13 is equal to or less than line 4, stop here. The PSC has met the minimum distribution requirement. Do not complete Part II and do not attach Schedule H to the PSC’s income tax return. Keep Schedule H with the PSC’s tax records. • If line 13 is more than line 4, the PSC’s deduction for applicable amounts is limited under section 280H. Complete Part II to figure the maximum amount the PSC can deduct.
Part II Maximum Deductible Amount (see instructions)
14	Enter amount from line 4	14
15	Enter number of months in deferral period of applicable election year	15
16	Divide line 14 by line 15	16
17	Nondeferral period. Subtract the number of months in the deferral period from the number of months in the applicable tax year. Enter the result	17
18	Multiply line 16 by line 17	18
19	Maximum deductible amount. Add lines 14 and 18. The PSC’s deduction for applicable amounts paid or incurred to employee-owners is limited to this amount. Attach Schedule H to the PSC’s income tax return. Any amount not allowed because of the section 280H(d) limitation is treated as paid or incurred in the PSC’s succeeding tax year	19

Corporations completing Schedule H must attach it to Form 1120. Accurate historical income tracking is essential for correctly calculating the base period average and determining compliance with the Section 280H cap. Failure to comply may trigger IRS penalties and adjusted assessments.

Last reviewed: 2025‑10‑26: If you believe this form requires an update, please contact us.

Since Schedule H applies only to PSCs, not all corporations are required to file it. However, those that do must ensure their internal payroll practices and year-end bonuses align with the allowable deduction threshold. Consulting a tax advisor is recommended for PSCs navigating Section 280H requirements.

Frequently Asked Questions

Can I estimate the General Business Credit?

Start with Form 3800 and then reflect the credit here.

How much would a 401(k) contribution change my net?

Model it with the 401(k) Calculator then rerun this page with your pre-tax amount.

Considering an IRS Offer in Compromise?

Read through Form 656-B to understand eligibility and steps.

What does FICA include?

FICA includes Social Security and Medicare payroll taxes withheld from employee wages.

Is there a quick pay-frequency comparison?

Yes—switch frequency on this page; for employer filings see 941 vs 944.

Important Notes

All calculations are estimates for guidance only. Always review your return and consider professional advice when submitting official filings.