What Is a Personal-Service Activity?
A personal-service activity is any business enterprise, possibly a startup, with the primary purpose of providing a personal service. Personal-service activities encompass a wide range of professions, including law, medicine, engineering, design, finance, accounting, and even performing arts. The goal of the business is to provide a personal service directly to customers, such as legal advice or medical treatment.
- A personal-service activity is any business enterprise with the primary purpose of providing personal services.
- Personal-service activities include professions such as law, medicine, engineering, design, finance, accounting, and the performing arts.
- The goal of the business is to provide a personal service directly to customers, such as legal advice or medical treatment.
Understanding Personal-Service Activity
Personal-service activities are also called “professional services” or “services.” Personal-service activities do not require the use of capital in order to generate material income. In other words, the revenue that’s generated is not passive–such as income from investments–but instead, directly from servicing customers.
A company engaged in personal services can become registered as a personal service corporation. Certain conditions must be met for a corporation to become a personal service corporation, and specific corporate tax rates and policies apply. Mapping personal-service activities to a personal service corporation is an important element of corporate entity classification under U.S. law.
Personal Service Corporation
A material participation test is needed to determine whether or not a taxpayer is a material participant in a personal-service business, according to the Internal Revenue Service (IRS). Taxpayers who meet one of the test guidelines will most likely be able to deduct business losses. Two examples of the testing requirements are:
- The taxpayer must participate in the business for more than 500 hours.
- The business owner’s or taxpayer’s participation constitutes all of the substantial participation in the business during the tax year.
According to the IRS website, personal services include activity in one of the following fields:
- Actuarial science
- Health (including veterinary services)
- The performing arts
According to the IRS, to be classified as an employee-owner of a personal service corporation, both conditions outlined below must be met.
- “He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period.
- He or she owns any stock in the corporation at any time during the testing period.”
If in any tax year, the taxpayer satisfies one of the criteria from the material participation test, the personal service activity will qualify as a personal service corporation. As a result, tax rates for the business might be different from the individual’s tax rate.
Personal service corporations can benefit from limited liability in some cases, in the event of bankruptcy. Additional business tax deductions might also be available, which reduce taxable income. However, it’s important to consult a tax professional since tax laws can change from year-to-year.