What is the form of your entity as defined by the irs

Question

Can you give me plain English definitions for the following: (1) a closely held corporation, (2) a personal holding company, and (3) a personal service corporation?

Answer

Generally, a closely held corporation is a corporation that:

• Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year, and
• Isn't a personal service corporation.

A closely held corporation is subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers.

Refer to Publication 542, Corporations for more information.

Personal Holding Company

A corporation will be considered a personal holding company if it meets both the Income Test and the Stock Ownership Test.

• The Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from certain dividends, interest, rent, royalties, and annuities.
• The Stock Ownership Test states that at any time during the last half of the tax year, 5 or fewer individuals must directly or indirectly own more than 50% in value of the corporation's outstanding stock.

Refer to the Instructions for Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax for more information and for a list of exceptions.

Personal Service Corporation

• Its principal activity is performing personal services during the "testing period."
• Its employee-owners substantially perform the services. A corporation meets this requirement if more than 20% of the corporation's compensation cost for performing personal services is for personal services its employee-owners perform during the testing period.
• Its employee-owners own more than 10% of the fair market value of its outstanding stock.
• Personal services include, but aren't limited to, any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law firms, and the performing arts.

Generally, the testing period for any tax year is the prior tax year. If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of:

A. The last day of its tax year, or
B. The last day of the calendar year in which its tax year begins.

Refer to Publication 542 for more information.

U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of taxpayers.

United States Persons

The term ''United States person'' means:

• A citizen or resident of the United States
• A domestic partnership
• A domestic corporation
• Any estate other than a foreign estate
• Any trust if:
  • A court within the United States is able to exercise primary supervision over the administration of the trust, and
  • One or more United States persons have the authority to control all substantial decisions of the trust

• Any other person that is not a foreign person.

Foreign Persons

A foreign person includes:

• Nonresident alien individual
• Foreign corporation
• Foreign partnership
• Foreign trust
• A foreign estate
• Any other person that is not a U.S. person

Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person. Refer to Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.

Check-the-box Entities (See Form 8832 and Instructions)

For Federal tax purposes, certain business entities automatically are classified as corporations. Other business entities may choose how they are classified for Federal tax purposes. Except for a business entity automatically classified as a corporation, a business entity with at least two members can choose to be classified as either an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner.

References/Related Topics

• Foreign Persons
• Foreign Governments and Certain Other Foreign Organizations

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.