---
kind: "range"
citation: "26 C.F.R. §§ 1.441-0–1.441-3"
title: "26"
from: "1.441-0"
to: "1.441-3"
count: 4
url: "https://uscodex.org/cfr/26/1.441-0..1.441-3"
---

# §1.441-0. Table of contents.


This section lists the captions contained in [§§ 1.441-1 through 1.441-4](/cfr/26/1.441-1..1.441-4.md) as follows:


# §1.441-1. Period for computation of taxable income.

- (a) **Computation of taxable income—**
  - (1) **In general.** Taxable income must be computed and a return must be made for a period known as the taxable year. For rules relating to methods of accounting, the taxable year for which items of gross income are included and deductions are taken, inventories, and adjustments, see parts II and III ([section 446](/cfr/26/446.md) and following), subchapter E, chapter 1 of the Internal Revenue Code, and the regulations thereunder.
  - (2) **Length of taxable year.** Except as otherwise provided in the Internal Revenue Code and the regulations thereunder (e.g., [§ 1.441-2](/cfr/26/1.441-2.md) regarding 52-53-week taxable years), a taxable year may not cover a period of more than 12 calendar months.
- (b) **General rules and definitions.** The general rules and definitions in this [paragraph (b)](#b) apply for purposes of sections [441](/cfr/26/441.md) and [442](/cfr/26/442.md) and the regulations thereunder.
  - (1) **Taxable year. Taxable year—** means—
    - (i) The period for which a return is made, if a return is made for a period of less than 12 months (short period). See [section 443](/cfr/26/443.md) and the regulations thereunder;
    - (ii) Except as provided in [paragraph (b)(1)(i)](#b-1-i) of this section, the taxpayer's required taxable year (as defined in [paragraph (b)(2)](#b-2) of this section), if applicable;
    - (iii) Except as provided in paragraphs [(b)(1)(i)](#b-1-i) and [(ii)](#b-1-ii) of this section, the taxpayer's annual accounting period (as defined in [paragraph (b)(3)](#b-3) of this section), if it is a calendar year or a fiscal year; or
    - (iv) Except as provided in paragraphs [(b)(1)(i)](#b-1-i) and [(ii)](#b-1-ii) of this section, the calendar year, if the taxpayer keeps no books, does not have an annual accounting period, or has an annual accounting period that does not qualify as a fiscal year.
  - (2) **Required taxable year—**
    - (i) **In general.** Certain taxpayers must use the particular taxable year that is required under the Internal Revenue Code and the regulations thereunder (the required taxable year). For example, the required taxable year is—
      - (A) [Reserved]
      - (B) In the case of a personal service corporation (PSC), the taxable year determined under [section 441(i)](/cfr/26/441.md?p=i) and [§ 1.441-3](/cfr/26/1.441-3.md);
      - (C) In the case of a nuclear decommissioning fund, the taxable year determined under [§ 1.468A-4(c)(1)](/cfr/26/1.468A-4.md?p=c-1);
      - (D) In the case of a designated settlement fund or a qualified settlement fund, the taxable year determined under [§ 1.468B-2(j)](/cfr/26/1.468B-2.md?p=j);
      - (E) In the case of a common trust fund, the taxable year determined under [section 584(i)](/cfr/26/584.md?p=i);
      - (F) In the case of certain trusts, the taxable year determined under [section 644](/cfr/26/644.md);
      - (G) In the case of a partnership, the taxable year determined under [section 706](/cfr/26/706.md) and [§ 1.706-1](/cfr/26/1.706-1.md);
      - (H) In the case of an insurance company, the taxable year determined under [section 843](/cfr/26/843.md) and [§ 1.1502-76(a)(2)](/cfr/26/1.1502-76.md?p=a-2);
      - (I) In the case of a real estate investment trust, the taxable year determined under [section 859](/cfr/26/859.md);
      - (J) In the case of a real estate mortgage investment conduit, the taxable year determined under [section 860D(a)(5)](/cfr/26/860D.md?p=a-5) and [§ 1.860D-1(b)(6)](/cfr/26/1.860D-1.md?p=b-6);
      - (K) In the case of a specified foreign corporation, the taxable year determined under [section 898(c)(1)(A)](/cfr/26/898.md?p=c-1-A);
      - (L) In the case of an S corporation, the taxable year determined under [section 1378](/cfr/26/1378.md) and [§ 1.1378-1](/cfr/26/1.1378-1.md); or
      - (M) In the case of a member of an affiliated group that makes a consolidated return, the taxable year determined under [§ 1.1502-76](/cfr/26/1.1502-76.md).
    - (ii) **Exceptions.** Notwithstanding [paragraph (b)(2)(i)](#b-2-i) of this section, the following taxpayers may have a taxable year other than their required taxable year:
      - (A) **52-53-week taxable years.** Certain taxpayers may elect to use a 52-53-week taxable year that ends with reference to their required taxable year. See, for example, §§ [1.441-3 (PSCs)](/cfr/26/1.441-3.md?p=PSCs), [1.706-1](/cfr/26/1.706-1.md) (partnerships), 1.1378-1 (S corporations), and 1.1502-76(a)(1) (members of a consolidated group).
      - (B) **Partnerships, S corporations, and PSCs.** A partnership, S corporation, or PSC may use a taxable year other than its required taxable year if the taxpayer elects to use a taxable year other than its required taxable year under [section 444](/cfr/26/444.md), elects a 52-53-week taxable year that ends with reference to its required taxable year as provided in [paragraph (b)(2)(ii)(A)](#b-2-ii-A) of this section or to a taxable year elected under [section 444](/cfr/26/444.md), or establishes a business purpose to the satisfaction of the Commissioner under [section 442](/cfr/26/442.md) (such as a grandfathered fiscal year).
      - (C) **Specified foreign corporations.** A specified foreign corporation (as defined in [section 898(b)](/cfr/26/898.md?p=b)) may use a taxable year other than its required taxable year if it elects a 52-53-week taxable year that ends with reference to its required taxable year as provided in [paragraph (b)(2)(ii)(A)](#b-2-ii-A) of this section or makes a one-month deferral election under [section 898(c)(1)(B)](/cfr/26/898.md?p=c-1-B).
  - (3) Annual accounting period. Annual accounting period means the annual period (calendar year or fiscal year) on the basis of which the taxpayer regularly computes its income in keeping its books.
  - (4) Calendar year. Calendar year means a period of 12 consecutive months ending on December 31. A taxpayer who has not established a fiscal year must make its return on the basis of a calendar year.
  - (5) **Fiscal year—**
    - (i) **Definition. Fiscal year—** means—
      - (A) A period of 12 consecutive months ending on the last day of any month other than December; or
      - (B) **A 52-53-week taxable year, if such period has been elected by the taxpayer.** See [§ 1.441-2](/cfr/26/1.441-2.md).
    - (ii) **Recognition.** A fiscal year will be recognized only if the books of the taxpayer are kept in accordance with such fiscal year.
  - (6) Grandfathered fiscal year. Grandfathered fiscal year means a fiscal year (other than a year that resulted in a three month or less deferral of income) that a partnership or an S corporation received permission to use on or after July 1, 1974, by a letter ruling (i.e., not by automatic approval).
  - (7) **Books. Books—** include the taxpayer's regular books of account and such other records and data as may be necessary to support the entries on the taxpayer's books and on the taxpayer's return, as for example, a reconciliation of any difference between such books and the taxpayer's return. Records that are sufficient to reflect income adequately and clearly on the basis of an annual accounting period will be regarded as the keeping of books. See [section 6001](/cfr/26/6001.md) and the regulations thereunder for rules relating to the keeping of books and records.
  - (8) **Taxpayer. Taxpayer—** has the same meaning as the term person as defined in [section 7701(a)(1)](/cfr/26/7701.md?p=a-1) (e.g., an individual, trust, estate, partnership, association, or corporation) rather than the meaning of the term taxpayer as defined in [section 7701(a)(14)](/cfr/26/7701.md?p=a-14) (any person subject to tax).
- (c) **Adoption of taxable year—**
  - (1) **In general.** Except as provided in [paragraph (c)(2)](#c-2) of this section, a new taxpayer may adopt any taxable year that satisfies the requirements of [section 441](/cfr/26/441.md) and the regulations thereunder without the approval of the Commissioner. A taxable year of a new taxpayer is adopted by filing its first Federal income tax return using that taxable year. The filing of an application for automatic extension of time to file a Federal income tax return (e.g., Form 7004, “Application for Automatic Extension of Time to File Corporation Income Tax Return”), the filing of an application for an employer identification number (i.e., Form SS-4, “Application for Employer Identification Number”), or the payment of estimated taxes, for a particular taxable year do not constitute an adoption of that taxable year.
  - (2) **Approval required—**
    - (i) **Taxpayers with required taxable years.** A newly-formed partnership, S corporation, or PSC that wants to adopt a taxable year other than its required taxable year, a taxable year elected under [section 444](/cfr/26/444.md), or a 52-53-week taxable year that ends with reference to its required taxable year or a taxable year elected under [section 444](/cfr/26/444.md) must establish a business purpose and obtain the approval of the Commissioner under [section 442](/cfr/26/442.md).
    - (ii) **Taxpayers without books.** A taxpayer that must use a calendar year under [section 441(g)](/cfr/26/441.md?p=g) and [paragraph (f)](#f) of this section may not adopt a fiscal year without obtaining the approval of the Commissioner.
- (d) **Retention of taxable year.** In certain cases, a partnership, S corporation, electing S corporation, or PSC will be required to change its taxable year unless it obtains the approval of the Commissioner under [section 442](/cfr/26/442.md), or makes an election under [section 444](/cfr/26/444.md), to retain its current taxable year. For example, a corporation using a June 30 fiscal year that either becomes a PSC or elects to be an S corporation and, as a result, is required to use the calendar year under section [441(i)](/cfr/26/441.md?p=i) or [1378](/cfr/26/1378.md), respectively, must obtain the approval of the Commissioner to retain its current fiscal year. Similarly, a partnership using a taxable year that corresponds to its required taxable year must obtain the approval of the Commissioner to retain such taxable year if its required taxable year changes as a result of a change in ownership. However, a partnership that previously established a business purpose to the satisfaction of the Commissioner to use a taxable year is not required to obtain the approval of the Commissioner if its required taxable year changes as a result of a change in ownership.
- (e) **Change of taxable year.** Once a taxpayer has adopted a taxable year, such taxable year must be used in computing taxable income and making returns for all subsequent years unless the taxpayer obtains approval from the Commissioner to make a change or the taxpayer is otherwise authorized to change without the approval of the Commissioner under the Internal Revenue Code (e.g., section [444](/cfr/26/444.md) or [859](/cfr/26/859.md)) or the regulations thereunder.
- (f) **Obtaining approval of the Commissioner or making a section 444 election.** See [§ 1.442-1(b)](/cfr/26/1.442-1.md?p=b) for procedures for obtaining approval of the Commissioner (automatically or otherwise) to adopt, change, or retain an annual accounting period. See §§ [1.444-1T](/cfr/26/1.444-1T.md) and [1.444-2T](/cfr/26/1.444-2T.md) for qualifications, and 1.444-3T for procedures, for making an election under [section 444](/cfr/26/444.md).

# §1.441-2. Election of taxable year consisting of 52-53 weeks.

- (a) **In general—**
  - (1) **Election.** An eligible taxpayer may elect to compute its taxable income on the basis of a fiscal year that—
    - (i) Varies from 52 to 53 weeks;
    - (ii) Ends always on the same day of the week; and
    - (iii) **Ends always on—**
      - (A) Whatever date this same day of the week last occurs in a calendar month; or
      - (B) Whatever date this same day of the week falls that is the nearest to the last day of the calendar month.
  - (2) **Effect.** In the case of a taxable year described in [paragraph (a)(1)(iii)(A)](#a-1-iii-A) of this section, the year will always end within the month and may end on the last day of the month, or as many as six days before the end of the month. In the case of a taxable year described in [paragraph (a)(1)(iii)(B)](#a-1-iii-B) of this section, the year may end on the last day of the month, or as many as three days before or three days after the last day of the month.
  - (3) **Eligible taxpayer.** A taxpayer is eligible to elect a 52-53-week taxable year if such fiscal year would otherwise satisfy the requirements of [section 441](/cfr/26/441.md) and the regulations thereunder. For example, a taxpayer that is required to use a calendar year under [§ 1.441-1(b)(2)(i)(D)](/cfr/26/1.441-1.md?p=b-2-i-D) is not an eligible taxpayer.
  - (4) **Example.** The provisions of this [paragraph (a)](#a) are illustrated by the following example:
- (b) **Procedures to elect a 52-53-week taxable year—**
  - (1) **Adoption of a 52-53-week taxable year—**
    - (i) **In general.** A new eligible taxpayer elects a 52-53-week taxable year by adopting such year in accordance with [§ 1.441-1(c)](/cfr/26/1.441-1.md?p=c). A newly-formed partnership, S corporation or personal service corporation (PSC) may adopt a 52-53-week taxable year without the approval of the Commissioner if such year ends with reference to either the taxpayer's required taxable year (as defined in [§ 1.441-1(b)(2)](/cfr/26/1.441-1.md?p=b-2)) or the taxable year elected under [section 444](/cfr/26/444.md). See §§ [1.441-3](/cfr/26/1.441-3.md), [1.706-1](/cfr/26/1.706-1.md), and [1.1378-1](/cfr/26/1.1378-1.md). Similarly, a newly-formed specified foreign corporation (as defined in [section 898(b)](/cfr/26/898.md?p=b)) may adopt a 52-53-week taxable year if such year ends with reference to the taxpayer's required taxable year, or, if the one-month deferral election under [section 898(c)(1)(B)](/cfr/26/898.md?p=c-1-B) is made, with reference to the month immediately preceding the required taxable year. See [§ 1.1502-76(a)(1)](/cfr/26/1.1502-76.md?p=a-1) for special rules regarding subsidiaries adopting 52-53-week taxable years.
    - (ii) **Filing requirement.** A taxpayer adopting a 52-53-week taxable year must file with its Federal income tax return for its first taxable year a statement containing the following information—
      - (A) The calendar month with reference to which the 52-53-week taxable year ends;
      - (B) The day of the week on which the 52-53-week taxable year always will end; and
      - (C) Whether the 52-53-week taxable year will always end on the date on which that day of the week last occurs in the calendar month, or on the date on which that day of the week falls that is nearest to the last day of that calendar month.
  - (2) **Change to (or from) a 52-53-week taxable year—**
    - (i) **In general.** An election of a 52-53-week taxable year by an existing eligible taxpayer with an established taxable year is treated as a change in annual accounting period that requires the approval of the Commissioner in accordance with [§ 1.442-1](/cfr/26/1.442-1.md). Thus, a taxpayer must obtain approval to change from its current taxable year to a 52-53-week taxable year, even if such 52-53-week taxable year ends with reference to the same calendar month. Similarly, a taxpayer must obtain approval to change from a 52-53-week taxable year, or to change from one 52-53-week taxable year to another 52-53-week taxable year. However, a taxpayer may obtain approval for 52-53-week taxable year changes automatically to the extent provided in administrative procedures published by the Commissioner. See [§ 1.442-1(b)](/cfr/26/1.442-1.md?p=b) for procedures for obtaining such approval.
    - (ii) **Special rules for the short period required to effect the change.** If a change to or from a 52-53-week taxable year results in a short period (within the meaning of [§ 1.443-1(a)](/cfr/26/1.443-1.md?p=a)) of 359 days or more, or six days or less, the tax computation under [§ 1.443-1(b)](/cfr/26/1.443-1.md?p=b) does not apply. If the short period is 359 days or more, it is treated as a full taxable year. If the short period is six days or less, such short period is not a separate taxable year but instead is added to and deemed a part of the following taxable year. (In the case of a change to or from a 52-53-week taxable year not involving a change of the month with reference to which the taxable year ends, the tax computation under [§ 1.443-1(b)](/cfr/26/1.443-1.md?p=b) does not apply because the short period will always be 359 days or more, or six days or less.) In the case of a short period which is more than six days and less than 359 days, taxable income for the short period is placed on an annual basis for purposes of [§ 1.443-1(b)](/cfr/26/1.443-1.md?p=b) by multiplying such income by 365 and dividing the result by the number of days in the short period. In such case, the tax for the short period is the same part of the tax computed on such income placed on an annual basis as the number of days in the short period is of 365 days (unless [§ 1.443-1(b)(2)](/cfr/26/1.443-1.md?p=b-2), relating to the alternative tax computation, applies). For an adjustment in deduction for personal exemption, see [§ 1.443-1(b)(1)(v)](/cfr/26/1.443-1.md?p=b-1-v).
  - (3) **Examples.** The following examples illustrate [paragraph (b)(2)(ii)](#b-2-ii) of this section:
- (c) **Application of effective dates—**
  - (1) **In general.** Except as provided in [paragraph (c)(3)](#c-3) of this section, for purposes of determining the effective date (e.g., of legislative, regulatory, or administrative changes) or the applicability of any provision of the internal revenue laws that is expressed in terms of taxable years beginning, including, or ending with reference to the first or last day of a specified calendar month, a 52-53-week taxable year is deemed to begin on the first day of the calendar month nearest to the first day of the 52-53-week taxable year, and is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week taxable year, as the case may be. Examples of provisions of this title, the applicability of which is expressed in terms referred to in the preceding sentence, include the provisions relating to the time for filing returns and other documents, paying tax, or performing other acts, and the provisions of part II, subchapter B, chapter 6 ([section 1561](/cfr/26/1561.md) and following) relating to surtax exemptions of certain controlled corporations.
  - (2) **Examples.** The provisions of [paragraph (c)(1)](#c-1) of this section may be illustrated by the following examples:
  - (3) **Changes in tax rates.** If a change in the rate of tax is effective during a 52-53-week taxable year (other than on the first day of such year as determined under [paragraph (c)(1)](#c-1) of this section), the tax for the 52-53-week taxable year must be computed in accordance with [section 15](/cfr/26/15.md), relating to effect of changes, and the regulations thereunder. For the purpose of the computation under [section 15](/cfr/26/15.md), the determination of the number of days in the period before the change, and in the period on and after the change, is to be made without regard to the provisions of [paragraph (b)(1)](#b-1) of this paragraph.
  - (4) **Examples.** The provisions of [paragraph (c)(3)](#c-3) of this section may be illustrated by the following examples:
- (d) **Computation of taxable income.** The principles of [section 451](/cfr/26/451.md), relating to the taxable year for inclusion of items of gross income, and [section 461](/cfr/26/461.md), relating to the taxable year for taking deductions, generally are applicable to 52-53-week taxable years. Thus, except as otherwise provided, all items of income and deduction must be determined on the basis of a 52-53-week taxable year. However, a taxpayer may determine particular items as though the 52-53-week taxable year were a taxable year consisting of 12 calendar months, provided that practice is consistently followed by the taxpayer and clearly reflects income. For example, an allowance for depreciation or amortization may be determined on the basis of a 52-53-week taxable year, or as though the 52-53-week taxable year is a taxable year consisting of 12 calendar months, provided the taxpayer consistently follows that practice with respect to all depreciable or amortizable items.
- (e) **Treatment of taxable years ending with reference to the same calendar month—**
  - (1) **Pass-through entities.** If a pass-through entity (as defined in [paragraph (e)(3)(i)](#e-3-i) of this section) or an owner of a pass-through entity (as defined in [paragraph (e)(3)(ii)](#e-3-ii) of this section), or both, use a 52-53-week taxable year and the taxable year of the pass-through entity and the owner end with reference to the same calendar month, then, for purposes of determining the taxable year in which items of income, gain, loss, deductions, or credits from the pass-through entity are taken into account by the owner of the pass-through, the owner's taxable year will be deemed to end on the last day of the pass-through's taxable year. Thus, if the taxable year of a partnership and a partner end with reference to the same calendar month, then for purposes of determining the taxable year in which that partner takes into account items described in [section 702](/cfr/26/702.md) and items that are deductible by the partnership (including items described in [section 707(c)](/cfr/26/707.md?p=c)) and includible in the income of that partner, that partner's taxable year will be deemed to end on the last day of the partnership's taxable year. Similarly, if the taxable year of an S corporation and a shareholder end with reference to the same calendar month, then for purposes of determining the taxable year in which that shareholder takes into account items described in [section 1366(a)](/cfr/26/1366.md?p=a) and items that are deductible by the S corporation and includible in the income of that shareholder, that shareholder's taxable year will be deemed to end on the last day of the S corporation's taxable year.
  - (2) **Personal service corporations and employee-owners.** If the taxable year of a PSC (within the meaning of [§ 1.441-3(c)](/cfr/26/1.441-3.md?p=c)) and an employee-owner (within the meaning of [§ 1.441-3(g)](/cfr/26/1.441-3.md?p=g)) end with reference to the same calendar month, then for purposes of determining the taxable year in which an employee-owner takes into account items that are deductible by the PSC and includible in the income of the employee-owner, the employee-owner's taxable year will be deemed to end on the last day of the PSC's taxable year.
  - (3) **Definitions—**
    - (i) **Pass-through entity.** For purposes of this section, a pass-through entity means a partnership, S corporation, trust, estate, closely-held real estate investment trust (within the meaning of [section 6655(e)(5)(B)](/cfr/26/6655.md?p=e-5-B)), common trust fund (within the meaning of [section 584(i)](/cfr/26/584.md?p=i)), controlled foreign corporation (within the meaning of [section 957](/cfr/26/957.md)), foreign personal holding company (within the meaning of [section 552](/cfr/26/552.md)), or passive foreign investment company that is a qualified electing fund (within the meaning of [section 1295](/cfr/26/1295.md)).
    - (ii) **Owner of a pass-through entity.** For purposes of this section, an owner of a pass-through entity generally means a taxpayer that owns an interest in, or stock of, a pass-through entity. For example, an owner of a pass-through entity includes a partner in a partnership, a shareholder of an S corporation, a beneficiary of a trust or an estate, an owner of a closely-held real estate investment trust (within the meaning of [section 6655(e)(5)(A)](/cfr/26/6655.md?p=e-5-A)), a participant in a common trust fund, a U.S. shareholder (as defined in [section 951(b)](/cfr/26/951.md?p=b)) of a controlled foreign corporation, a U.S. shareholder (as defined in [section 551(a)](/cfr/26/551.md?p=a)) of a foreign personal holding company, or a U.S. person that holds stock in a passive foreign investment company that is a qualified electing fund with respect to that shareholder.
  - (4) **Examples.** The provisions of [paragraph (e)(2)](#e-2) of this section may be illustrated by the following examples:
  - (5) **Transition rule.** In the case of an owner of a pass-through entity (other than the owner of a partnership or S corporation) that is required by this [paragraph (e)](#e) to include in income for its first taxable year ending on or after May 17, 2002 amounts attributable to two taxable years of a pass-through entity, the amount that otherwise would be required to be included in income for such first taxable year by reason of this [paragraph (e)](#e) should be included in income ratably over the four-taxable-year period beginning with such first taxable year under principles similar to [§ 1.702-3T](/cfr/26/1.702-3T.md), unless the owner of the pass-through entity elects to include all such income in its first taxable year ending on or after May 17, 2002.

# §1.441-3. Taxable year of a personal service corporation.

- (a) **Taxable year—**
  - (1) **Required taxable year.** Except as provided in [paragraph (a)(2)](#a-2) of this section, the taxable year of a personal service corporation (PSC) (as defined in [paragraph (c)](#c) of this section) must be the calendar year.
  - (2) **Exceptions.** A PSC may have a taxable year other than its required taxable year (i.e., a fiscal year) if it makes an election under [section 444](/cfr/26/444.md), elects to use a 52-53-week taxable year that ends with reference to the calendar year or a taxable year elected under [section 444](/cfr/26/444.md), or establishes a business purpose for such fiscal year and obtains the approval of the Commissioner under [section 442](/cfr/26/442.md).
- (b) **Adoption, change, or retention of taxable year—**
  - (1) **Adoption of taxable year.** A PSC may adopt, in accordance with [§ 1.441-1(c)](/cfr/26/1.441-1.md?p=c), the calendar year, a taxable year elected under [section 444](/cfr/26/444.md), or a 52-53-week taxable year ending with reference to the calendar year or a taxable year elected under [section 444](/cfr/26/444.md) without the approval of the Commissioner. See [§ 1.441-1](/cfr/26/1.441-1.md). A PSC that wants to adopt any other taxable year must establish a business purpose and obtain the approval of the Commissioner under [section 442](/cfr/26/442.md).
  - (2) **Change in taxable year.** A PSC that wants to change its taxable year must obtain the approval of the Commissioner under [section 442](/cfr/26/442.md) or make an election under [section 444](/cfr/26/444.md). However, a PSC may obtain automatic approval for certain changes, including a change to the calendar year or to a 52-53-week taxable year ending with reference to the calendar year, pursuant to administrative procedures published by the Commissioner.
  - (3) **Retention of taxable year.** In certain cases, a PSC will be required to change its taxable year unless it obtains the approval of the Commissioner under [section 442](/cfr/26/442.md), or makes an election under [section 444](/cfr/26/444.md), to retain its current taxable year. For example, a corporation using a June 30 fiscal year that becomes a PSC and, as a result, is required to use the calendar year must obtain the approval of the Commissioner to retain its current fiscal year.
  - (4) **Procedures for obtaining approval or making a section 444 election.** See [§ 1.442-1(b)](/cfr/26/1.442-1.md?p=b) for procedures to obtain the approval of the Commissioner (automatically or otherwise) to adopt, change, or retain a taxable year. See §§ [1.444-1T](/cfr/26/1.444-1T.md) and [1.444-2T](/cfr/26/1.444-2T.md) for qualifications, and 1.444-3T for procedures, for making an election under [section 444](/cfr/26/444.md).
  - (5) **Examples.** The provisions of [paragraph (b)(4)](#b-4) of this section may be illustrated by the following examples:
- (c) **Personal service corporation defined—**
  - (1) **In general.** For purposes of this section and [section 442](/cfr/26/442.md), a taxpayer is a PSC for a taxable year only if—
    - (i) The taxpayer is a C corporation (as defined in [section 1361(a)(2)](/cfr/26/1361.md?p=a-2)) for the taxable year;
    - (ii) The principal activity of the taxpayer during the testing period is the performance of personal services;
    - (iii) During the testing period, those services are substantially performed by employee-owners (as defined in [paragraph (g)](#g) of this section); and
    - (iv) Employee-owners own (as determined under the attribution rules of [section 318](/cfr/26/318.md), except that the language “any” applies instead of “50 percent” in [section 318(a)(2)(C)](/cfr/26/318.md?p=a-2-C)) more than 10 percent of the fair market value of the outstanding stock in the taxpayer on the last day of the testing period.
  - (2) **Testing period—**
    - (i) **In general.** Except as otherwise provided in [paragraph (c)(2)(ii)](#c-2-ii) of this section, the testing period for any taxable year is the immediately preceding taxable year.
    - (ii) **New corporations.** The testing period for a taxpayer's first taxable year is the period beginning on the first day of that taxable year and ending on the earlier of—
      - (A) The last day of that taxable year; or
      - (B) **The last day of the calendar year in which that taxable year begins.**
  - (3) **Examples.** The provisions of [paragraph (c)(2)(ii)](#c-2-ii) of this section may be illustrated by the following examples:
- (d) **Performance of personal services—**
  - (1) **Activities described in section 448(d)(2)(A).** For purposes of this section, any activity of the taxpayer described in [section 448(d)(2)(A)](/cfr/26/448.md?p=d-2-A) or the regulations thereunder will be treated as the performance of personal services. Therefore, any activity of the taxpayer that involves the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting (as such fields are defined in [§ 1.448-1T](/cfr/26/1.448-1T.md)) will be treated as the performance of personal services for purposes of this section.
  - (2) **Activities not described in section 448(d)(2)(A).** For purposes of this section, any activity of the taxpayer not described in [section 448(d)(2)(A)](/cfr/26/448.md?p=d-2-A) or the regulations thereunder will not be treated as the performance of personal services.
- (e) **Principal activity—**
  - (1) **General rule.** For purposes of this section, the principal activity of a corporation for any testing period will be the performance of personal services if the cost of the corporation's compensation (the compensation cost) for such testing period that is attributable to its activities that are treated as the performance of personal services within the meaning of [paragraph (d)](#d) of this section (i.e., the total compensation for personal service activities) exceeds 50 percent of the corporation's total compensation cost for such testing period.
  - (2) **Compensation cost—**
    - (i) **Amounts included.** For purposes of this section, the compensation cost of a corporation for a taxable year is equal to the sum of the following amounts allowable as a deduction, allocated to a long-term contract, or otherwise chargeable to a capital account by the corporation during such taxable year—
      - (A) Wages and salaries; and
      - (B) Any other amounts, attributable to services performed for or on behalf of the corporation by a person who is an employee of the corporation (including an owner of the corporation who is treated as an employee under [paragraph (g)(2)](#g-2) of this section) during the testing period. Such amounts include, but are not limited to, amounts attributable to deferred compensation, commissions, bonuses, compensation includible in income under [section 83](/cfr/26/83.md), compensation for services based on a percentage of profits, and the cost of providing fringe benefits that are includible in income.
    - (ii) **Amounts excluded.** Notwithstanding [paragraph (e)(2)(i)](#e-2-i) of this section, compensation cost does not include amounts attributable to a plan qualified under section [401(a)](/cfr/26/401.md?p=a) or [403(a)](/cfr/26/403.md?p=a), or to a simplified employee pension plan defined in [section 408(k)](/cfr/26/408.md?p=k).
  - (3) **Attribution of compensation cost to personal service activity—**
    - (i) **Employees involved only in the performance of personal services.** The compensation cost for employees involved only in the performance of activities that are treated as personal services under [paragraph (d)](#d) of this section, or employees involved only in supporting the work of such employees, are considered to be attributable to the corporation's personal service activity.
    - (ii) **Employees involved only in activities that are not treated as the performance of personal services.** The compensation cost for employees involved only in the performance of activities that are not treated as personal services under [paragraph (d)](#d) of this section, or for employees involved only in supporting the work of such employees, are not considered to be attributable to the corporation's personal service activity.
    - (iii) **Other employees.** The compensation cost for any employee who is not described in either paragraph [(e)(3)(i)](#e-3-i) or [(ii)](#e-3-ii) of this section (a mixed-activity employee) is allocated as follows—
      - (A) **Compensation cost attributable to personal service activity.** That portion of the compensation cost for a mixed activity employee that is attributable to the corporation's personal service activity equals the compensation cost for that employee multiplied by the percentage of the total time worked for the corporation by that employee during the year that is attributable to activities of the corporation that are treated as the performance of personal services under [paragraph (d)](#d) of this section. That percentage is to be determined by the taxpayer in any reasonable and consistent manner. Time logs are not required unless maintained for other purposes;
      - (B) **Compensation cost not attributable to personal service activity.** That portion of the compensation cost for a mixed activity employee that is not considered to be attributable to the corporation's personal service activity is the compensation cost for that employee less the amount determined in [paragraph (e)(3)(iii)(A)](#e-3-iii-A) of this section.
- (f) **Services substantially performed by employee-owners—**
  - (1) **General rule.** Personal services are substantially performed during the testing period by employee-owners of the corporation if more than 20 percent of the corporation's compensation cost for that period attributable to its activities that are treated as the performance of personal services within the meaning of [paragraph (d)](#d) of this section (i.e., the total compensation for personal service activities) is attributable to personal services performed by employee-owners.
  - (2) **Compensation cost attributable to personal services.** For purposes of [paragraph (f)(1)](#f-1) of this section—
    - (i) The corporation's compensation cost attributable to its activities that are treated as the performance of personal services is determined under [paragraph (e)(3)](#e-3) of this section; and
    - (ii) The portion of the amount determined under [paragraph (f)(2)(i)](#f-2-i) of this section that is attributable to personal services performed by employee-owners is to be determined by the taxpayer in any reasonable and consistent manner.
  - (3) **Examples.** The provisions of this [paragraph (f)](#f) may be illustrated by the following examples:
- (g) **Employee-owner defined—**
  - (1) **General rule.** For purposes of this section, a person is an employee-owner of a corporation for a testing period if—
    - (i) The person is an employee of the corporation on any day of the testing period; and
    - (ii) **The person owns any outstanding stock of the corporation on any day of the testing period.**
  - (2) **Special rule for independent contractors who are owners.** Any person who is an owner of the corporation within the meaning of [paragraph (g)(1)(ii)](#g-1-ii) of this section and who performs personal services for, or on behalf of, the corporation is treated as an employee for purposes of this section, even if the legal form of that person's relationship to the corporation is such that the person would be considered an independent contractor for other purposes.
- (h) **Special rules for affiliated groups filing consolidated returns—**
  - (1) **In general.** For purposes of applying this section to the members of an affiliated group of corporations filing a consolidated return for the taxable year—
    - (i) The members of the affiliated group are treated as a single corporation;
    - (ii) The employees of the members of the affiliated group are treated as employees of such single corporation; and
    - (iii) All of the stock of the members of the affiliated group that is not owned by any other member of the affiliated group is treated as the outstanding stock of that corporation.
  - (2) **Examples.** The provisions of this [paragraph (h)](#h) may be illustrated by the following examples: