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


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
  • Is not a personal service corporation.

The definitions for the terms "directly or indirectly" and "individual" are in Publication 542, Corporations.

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.

A personal holding company:

  • Is defined in Internal Revenue Code section 542.
  • A corporation will be considered a personal holding company if both the Income Test and the Stock Ownership Test are met.
    • The Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, royalties, and annuities.
    • The Stock Ownership Test states that at any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by 5 or fewer individuals.

Refer to the Instructions for Schedule PH (Form 1120) (PDF) for more information and a list of exceptions.

A personal service corporation:

  • Its principal activity is performing personal services during the "testing period."
  • Its employee-owners substantially perform the services. This requirement is met if more than 20% of the corporation’s compensation cost for its activities of performing personal services is for personal services performed by employee-owners during the "testing period."
  • Its employee-owners own more than 10% of the fair market value of its outstanding stock.
  • Personal services includes 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.

Additional Information:

Category: Small Business, Self-Employed, Other Business
Subcategory: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
1111 Constitution Avenue NW
Washington, DC 20224