---
kind: "section"
citation: "26 U.S.C. § 280H"
title: "26"
title_heading: "Internal Revenue Code"
number: "280H"
heading: "Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/280H"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter B — Computation of Taxable Income"
  - "Part IX — Items Not Deductible"
---

# §280H. Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years

- (a) **General rule—** If—
  - (1) an election by a personal service corporation under [section 444](/usc/26/444.md) is in effect for a taxable year, and
  - (2) such corporation does not meet the minimum distribution requirements of [subsection (c)](#c) for such taxable year,

  then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to [employee](/usc/26/430.md?p=c-7-D-vi)-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to [personal holding companies](/usc/26/542.md?p=a)).

- (b) **Carryover of nondeductible amounts—** If any amount is not allowed as a deduction for a taxable year under [subsection (a)](#a), such amount shall be treated as paid or incurred in the succeeding taxable year.
- (c) **Minimum distribution requirement—** For purposes of this section—
  - (1) **In general—** A personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period of the taxable year (determined without regard to [subsection (b)](#b)) equal or exceed the lesser of—
    - (A) the product of—
      - (i) the applicable amounts paid during the preceding taxable year, divided by the number of months in such taxable year, multiplied by
      - (ii) the number of months in the deferral period of the preceding taxable year, or
    - (B) the [applicable percentage](/usc/26/414.md?p=l-2-B) of the adjusted [taxable income](/usc/26/63.md?p=a) for the deferral period of the taxable year.
  - (2) **Applicable percentage—** The term “[applicable percentage](/usc/26/414.md?p=l-2-B)” means the percentage (not in excess of 95 percent) determined by dividing—
    - (A) the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by
    - (B) the adjusted [taxable income](/usc/26/63.md?p=a) of such corporation for such 3 taxable years.
- (d) **Maximum deductible amount—** For purposes of this section, the term “maximum deductible amount” means the sum of—
  - (1) the applicable amounts paid during the deferral period, plus
  - (2) an amount equal to the product of—
    - (A) the amount determined under [paragraph (1)](#d-1), divided by the number of months in the deferral period, multiplied by
    - (B) the number of months in the nondeferral period.
- (e) **Disallowance of net operating loss carrybacks—** No net operating loss carryback shall be allowed to (or from) any taxable year of a personal service corporation to which an election under [section 444](/usc/26/444.md) applies.
- (f) **Other definitions and special rules—** For purposes of this section—
  - (1) **Applicable amount—** The term “applicable amount” means any amount paid to an [employee](/usc/26/430.md?p=c-7-D-vi)-owner which is includible in the gross income of such [employee](/usc/26/430.md?p=c-7-D-vi), other than—
    - (A) any gain from the [sale or exchange](/usc/26/864.md?p=c-8-D) of [property](/usc/26/317.md?p=a) between the owner-[employee](/usc/26/430.md?p=c-7-D-vi) and the corporation, or
    - (B) any [dividend](/usc/26/316.md?p=a) paid by the corporation.
  - (2) **Employee-owner—** The term “[employee](/usc/26/430.md?p=c-7-D-vi)-owner” has the meaning given such term by [section 269A(b)(2)](/usc/26/269A.md?p=b-2) (as modified by [section 441(i)(2)](/usc/26/441.md?p=i-2)).
  - (3) **Nondeferral and deferral periods—**
    - (A) **Deferral period—** The term “deferral period” has the meaning given to such term by [section 444(b)(4)](/usc/26/444.md?p=b-4).
    - (B) **Nondeferral period—** The term “nondeferral period” means the portion of the taxable year of the personal service corporation which occurs after the portion of such year constituting the deferral period.
  - (4) **Adjusted taxable income—** The term “adjusted [taxable income](/usc/26/63.md?p=a)” means [taxable income](/usc/26/63.md?p=a) determined without regard to—
    - (A) any amount paid to an [employee](/usc/26/430.md?p=c-7-D-vi)-owner which is includible in the gross income of such [employee](/usc/26/430.md?p=c-7-D-vi)-owner, and
    - (B) any net operating loss carryover to the extent such carryover is attributable to amounts described in [subparagraph (A)](#f-4-A).
  - (5) **Personal service corporation—** The term “personal service corporation” has the meaning given to such term by [section 441(i)(2)](/usc/26/441.md?p=i-2).

## Source credit

(Added Pub. L. 100–203, title X, § 10206(c)(1), Dec. 22, 1987, 101 Stat. 1330–401; amended Pub. L. 100–647, title II, § 2004(e)(2)(B), (3), (14)(A), (C), Nov. 10, 1988, 102 Stat. 3600, 3602.)

## Notes

### Editorial Notes

### Amendments

1988—Subsecs. (c)(1)(A)(i), (d)(1). Pub. L. 100–647, § 2004(e)(14)(C), substituted “amounts paid” for “amounts paid or incurred”.

Subsec. (f)(2). Pub. L. 100–647, § 2004(e)(3), substituted “section 269A(b)(2) (as modified by section 441(i)(2))” for “section 296A(b)(2)”.

Subsec. (f)(4). Pub. L. 100–647, § 2004(e)(14)(A), amended par. (4) generally. Prior to amendment, par. (4) read as follows: “The term ‘adjusted taxable income’ means taxable income increased by any amount paid or incurred to an employee-owner which was includible in the gross income of such employee-owner.”

Subsec. (f)(5). Pub. L. 100–647, § 2004(e)(2)(B), added par. (5).

### Statutory Notes and Related Subsidiaries

### Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.

### Effective Date

Section applicable to taxable years beginning after Dec. 31, 1986, see section 10206(d)(1) of Pub. L. 100–203, set out as a note under section 444 of this title.