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Department of the Treasury
Instructions for Schedule PH Internal Revenue Service

(Form 1120)
(Rev. December 2016)

(Use with the November 2015 revision of Schedule PH (Form 1120))
U.S. Personal Holding Company (PHC) Tax

Section references are to the Internal last half of the tax year, more than earnings stripping rules as current
Revenue Code unless otherwise noted. 50% in value of the corporation's year deductions and losses.
outstanding stock is directly or
Future Developments indirectly owned by five or fewer
individuals. Specific Instructions
For the latest information about Important: To determine if a
developments related to Schedule PH For purposes of this requirement,
corporation is a PHC, follow the steps
(Form 1120) and its instructions, such the following organizations are
below to complete Schedule PH and
as legislation enacted after they were considered individuals.
the Worksheet, later.
published, go to www.irs.gov/ A qualified pension, profit-sharing,
form1120. or stock bonus plan described in 1. Complete Part I. Then,
section 401(a). complete lines 1 through 5 of the
A trust described in section 501(c) Worksheet.
(17) that provides for the payment of
What’s New 2. Complete Part II and then line 6
supplemental unemployment of the Worksheet.
For tax years beginning after compensation under certain 3. Generally, if line 6 of the
December 31, 2015, a corporation conditions. Worksheet is 60% or more and the
can elect to treat dividends paid after A private foundation described in stock ownership requirement (Part IV)
the end of the tax year and before the section 509(a). is met, the corporation must file
16th day of the 4th month following A part of a trust permanently set Schedule PH and pay the PHC tax.
the end of the tax year as paid during aside or exclusively used for the However, see Exceptions above.
its tax year. Special rules apply to purpose described in section 642(c).
4. If the corporation determines
corporations with tax years ending in that it must file Schedule PH and pay
June. See the instructions for line 12. Exceptions. The term “personal
holding company” does not include the PHC tax, it must complete Part III,
the following corporations, even if the line 26, to figure the amount of the
General Instructions two requirements above are met. PHC tax.
Tax-exempt corporations.
Purpose of Schedule Banks, domestic building and loan Part I. Undistributed
Use Schedule PH to figure the associations, and certain lending or Personal Holding
personal holding company (PHC) tax. finance companies. Company Income
Life insurance and surety
Who Must File companies. Additions
A corporation that is a PHC must file Certain small business investment Line 1. Taxable income before net
Schedule PH by attaching it to its companies operating under the Small operating loss deduction and spe-
income tax return. Business Investment Act of 1958. cial deductions. Enter the amount
Corporations under the jurisdiction from Form 1120, line 28. If the income
Personal Holding of the court in a title 11 or similar case. on line 28 was figured using section
Company Foreign corporations. 443(b) (placing the income on an
Generally, a corporation is a PHC if it At-risk, passive activities, and annual basis), refigure it without using
meets both of the following earnings stripping rules. A that section.
requirements. corporation that has an activity Line 3. Excess expenses and de-
1. PHC income test. At least 60% subject to the at-risk or passive preciation. If the corporation earned
of the corporation's adjusted ordinary activity rules or interest expense rent or other compensation for the use
gross income for the tax year is PHC subject to the earnings stripping rules of, or right to use, property and that
income. See the instructions for Part II (or both) may have deductions and rent or compensation was less than
and the Worksheet for Figuring losses suspended or limited under the total allowable expenses and
Ordinary Gross Income, Adjusted these rules. As a result, do not use depreciation, complete Part V in most
Ordinary Gross Income, and the PHC deductions and losses limited or cases and enter the excess on line 3.
Income Test (Worksheet), later. Also, suspended in any of the PHC However, if the corporation can
see Specific Instructions below. computations. Treat any prior year establish that it meets all three of the
2. Stock ownership deductions and losses allowed under requirements listed below, it can
requirement. At any time during the the at-risk, passive activity, and attach a statement instead of

Dec 21, 2016 Cat. No. 10826K

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completing Part V. The statement Line 7. Net operating loss. Instead amount of dividends excluded on
must include: of the net operating loss deduction line 14b.
A list of the deductions, with the provided in section 172, a deduction Line 15b. Amounts excluded. Enter
complete facts, circumstances, and is allowed for the net operating loss the total of interest excluded on
arguments supporting them, and (as defined in section 172(c)) for the line 15b. The following interest can be
The information required by preceding tax year figured without the excluded from PHC income.
Regulations section 1.545-2(h)(2). special dividends-received
1. Interest constituting rent.
To qualify, the corporation must deductions for corporations.
establish that: 2. Interest on amounts set aside in
Line 10. Total. Include in the total for
The rent or other compensation it a reserve fund under chapter 533 or
line 10 any deduction for amounts
received was the highest obtainable 535 of Title 46, United States Code.
used or irrevocably set aside to pay or
(if none was received, it must show 3. Interest received by a broker or
retire qualified indebtedness under
that none was obtainable), dealer (within the meaning of section
section 545(c) (as in effect before
The property was held in the course 3(a)(4) or (5) of the Securities
November 5, 1990). See Regulations
of a business carried on for profit, and Exchange Act of 1934) in connection
section 1.545-3. Enter the amount and
There was a reasonable with:
“Section 545(c)” on the dotted line
expectation that the property's a. Any securities or money market
next to line 10.
operation would result in a profit, or instruments held as property
that the property was necessary to Line 12. Dividends paid after the described in section 1221(a)(1),
conduct the business. end of the tax year. Generally, the
corporation can elect to treat b. Margin accounts, or
Deductions dividends (other than deficiency c. Any financing for a customer
Line 5. Federal and foreign in- dividends) paid after the end of the secured by securities or money
come, war profits, and excess year and before the 16th day of the market instruments.
profits taxes not deducted in figur- 4th month following the end of the tax 4. Interest from line 4d of the
ing line 1. The corporation can year as paid during its tax year. Worksheet.
deduct: However, a corporation with a fiscal
Federal income taxes accrued tax year ending on June 30, or a See sections 543(a)(1) and 543(b)
during the tax year, and corporation with a short tax year (2)(C) for more information.
Income, war profits, and excess ending anytime in June, can elect to Line 18. Rents. Rents can be
profits taxes accrued (or deemed treat dividends (other than deficiency excluded from PHC income if both of
paid) during the tax year to foreign dividends) paid after the end of the the following tests are met.
countries and U.S. possessions.* year and before the 16th day of the
The corporation cannot deduct: 3rd month following the end of the tax Test 1. The adjusted income from
The accumulated earnings tax year as paid during its tax year. Enter rents (line 18c) is at least 50% of
under section 531, or these dividends on line 12 but not in adjusted ordinary gross income.
The PHC tax under section 541. Part VI. Test 2. The sum of taxable
distributions (Part VI, line 3) and the
*The foreign tax credit is not Part II. Personal Holding deduction for dividends paid after the
allowed against PHC tax. But, as
described above, the corporation can Company Income end of the tax year (Part I, line 12) is at
least equal to:
take a deduction for taxes paid to Note. The term “ordinary gross 1. The excess, if any, of PHC
foreign countries and U.S. income” (used below) means line 3 of income, over
possessions even if a credit was the Worksheet. The term “adjusted
claimed when figuring the ordinary gross income” means line 5 2. 10% of ordinary gross income.
corporation's income tax. of the Worksheet. For this purpose, PHC income
Attach a schedule showing the type includes copyright royalties and
of tax, the tax year, and the amount. A corporation may be subject to the
For more information, see section PHC tax if at least 60% of its adjusted adjusted income from mineral, oil, and
545(b)(1). ordinary gross income for the tax year gas royalties, but does not include the
is PHC income. Use Part II to figure amounts from lines 18c and 22.
Line 6. Contributions. Figure the the amount of the corporation's PHC If both of the above tests are met,
deduction using the limitations under income. Then, complete line 6 of the rents can be excluded from PHC
sections 170(b)(1)(A), (B), (D), and Worksheet to determine if the income. Do not complete lines 18a
(E), but without sections 170(b)(2) corporation is a PHC. through 18c.
and (d)(1). When figuring the If the rents cannot be excluded,
limitations under section 170(b)(1), Line 14b. Dividends excluded.
use taxable income figured with the Dividends received by a U.S. enter rents (as defined in section
adjustments (other than the 10% shareholder (as defined in section 543(b)(3)) on line 18a. Enter the
limitation) provided in sections 170(b) 951(b)) from a controlled foreign amount from line 4a of the Worksheet
(2) and (d)(1) and without any corporation (as defined in section on line 18b and complete line 18c.
expenses and depreciation 957(a)) are excluded from personal See section 543(a)(2) for more
disallowed under section 545(b)(6). holding company income under information.
section 543(a)(1)(C). Enter the total

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Line 19. Mineral, oil, and gas royal- Copyright royalties received for the See section 543(d) for more
ties. Mineral, oil, and gas royalties use of, or right to use, copyrights on information.
can be excluded from PHC income if works created in whole or in part by
Line 21. Produced film rents.
all three of the tests below are met. any shareholder owning more than
Produced film rents can be excluded
10% of the corporation's stock.
Test 1. The adjusted income from from PHC income if the rents
PHC income does not include:
mineral, oil, and gas royalties constitute at least 50% of ordinary
Copyright royalties (other than as
(line 19c) is at least 50% of adjusted gross income. See section 543(a)(5)
stated above), or
ordinary gross income. for the definition of produced film
Dividends from any corporation that rents.
Test 2. PHC income is not more meets Test 1 above and Test 3 below,
than 10% of ordinary gross income. and in which the corporation owns at Line 22. Compensation received
For this purpose, PHC income least 50% (by vote and value) of the for the use of corporation property
includes copyright royalties and the stock. by a 25% or more shareholder.
This line applies only to a corporation
adjusted income from rents, but does Test 3. Total allocable deductions with other PHC income in excess of
not include line 19c. allowable under section 162 (other 10% of ordinary gross income. For
Test 3. The deductions allowable than compensation for personal purposes of this limitation, other PHC
under section 162 (other than services rendered by a shareholder, income is defined in section 543(a)(6)
compensation for personal services deductions for royalties paid or (C).
rendered by a shareholder and accrued, and deductions specifically Enter on line 22 amounts received
deductions specifically allowable allowable under other sections) are at as compensation for the use of, or
under other sections) are at least 15% least 25% of the excess of: right to use, tangible property of the
of adjusted ordinary gross income. 1. Ordinary gross income, over corporation by or for an individual,
If all of the above tests are met, 2. The sum of royalties paid or who at any time during the tax year
mineral, oil, and gas royalties can be accrued and depreciation for directly or indirectly owned at least
excluded from PHC income. Do not copyright royalties. 25% in value of the corporation's
complete lines 19a through 19c. outstanding stock.
Royalties received in
If mineral, oil, and gas royalties are connection with the licensing of Line 23. Amounts received under
not excluded, enter the total mineral, computer software. Royalties personal service contracts and
oil, and gas royalties (including received in connection with the from their sale. This line applies
production payments and overriding licensing of computer software can be only if the individual who has
royalties) on line 19a. Enter the excluded from PHC income if all four performed, is to perform, or may be
amount from line 4b of the Worksheet of the tests below are met. designated to perform such services
on line 19b and complete line 19c. owned at any time during the tax year
Test 1. The corporation is 25% or more in value of the
Line 20. Copyright royalties. engaged in the active business of corporation's outstanding stock.
Note. For royalties received in developing, manufacturing, or
Enter amounts received under a
connection with the licensing of producing computer software.
computer software, see below. contract that requires the corporation
Test 2. The royalties are at least to furnish personal services if any
Copyright royalties can be
50% of ordinary gross income. person other than the corporation has
excluded from PHC income if all three
the right to designate the individual
of the tests below are met. Test 3. Total allowable deductions who is to perform the services (or if
under sections 162, 174, and 195 that
Test 1. Income from copyright the individual who is to perform the
royalties is at least 50% of ordinary are allocable to the computer software services is designated in the
business are at least 25% of ordinary
gross income. For this purpose, contract). Also include amounts
copyright royalties do not include gross income (or, the average of the received from the sale or other
deductions for the 5 tax years ending
royalties received for the use of, or disposition of such a contract.
right to use, copyrights or interests in with the current tax year is at least
25% of the average ordinary gross Line 26. PHC tax. The tax rate on
copyrights on works created in whole undistributed personal holding
or in part by any shareholder. income for that period).
company income is 20%.
Test 4. The sum of taxable
Test 2. PHC income is not more Multiply the amount on Part I,
than 10% of ordinary gross income. distributions (Part VI, line 3) and the
deduction for dividends paid after the line 13, by 20%. Enter the result here
For this purpose, PHC income end of the tax year (Part I, line 12) is at and on Schedule J (Form 1120),
includes: least equal to the excess, if any, of: line 8, or on the proper line of the
The adjusted income from rents appropriate tax return.
(line 18c); 1. PHC income (as defined in
section 543(d)(5)(B)), over
The adjusted income from mineral,
oil, and gas royalties (line 19c); and 2. 10% of ordinary gross income.

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Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross
Income, and the PHC Income Test Keep for Your Records
Before you begin: (see instructions below)
1. Gross income. Insurance companies, other than life insurance companies, see section 543(c)
2. Less: Gains from the sale or disposition of capital assets and section 1231(b) property )
3. Ordinary gross income. Combine lines 1 and 2.
4. Adjustments:
a Deductions allocable to rents 4a
b Deductions allocable to certain royalties and working interests in oil and gas 4b
wells
c Deductions allocable to compensation described in section 543(b)(3)(D) 4c
d Certain excluded interest income under section 543(b)(2)(C) 4d
e Total adjustments. Add lines 4a through 4d. 4e
5. Adjusted ordinary gross income. Subtract line 4e from line 3
6. Complete Part II of Schedule PH. Divide Part II, line 25, by line 5 above. Enter the result as a
percentage
Important: If line 6 is less than 60%, the corporation is not a PHC. Do not file Schedule PH.
Generally, if line 6 is 60% or more and the stock ownership requirement of section 542(a) is met, the corporation is a PHC.
Complete Parts III and IV. For details and exceptions, see Who Must File and Personal Holding Company, earlier.

Worksheet Instructions below) allocable to rents (as defined Line 4c. Deductions allocable to
in section 543(b)(3)). compensation. Compensation for
Line 1. Gross income. Enter gross Depreciation and amortization of the use of, or right to use, tangible
income as defined in section 61 and property (other than certain tangible personal property manufactured or
the related regulations. personal property not customarily produced by the corporation does not
Line 4. Adjustments. Ordinary retained by any lessee for more than 3 count as rents if the corporation is
gross income on line 3 must be years). engaged in substantial manufacturing
adjusted as described below. Each Property taxes. or production of the same type of
type of income (rents, royalties, Interest. property during the tax year. Enter
income from working interests in oil Rent. deductions (listed below) allocable to
this type of compensation.
and gas wells, and certain excluded Line 4b. Deductions allocable to
Depreciation and amortization of
rents) is separately adjusted by the certain royalties and working
property (other than certain tangible
deductions allocable to it. Enter the interests in oil and gas wells. Enter
personal property).
allocable deductions on lines 4a, 4b, deductions (listed below) allocable to
Property taxes.
and 4c to the extent of the gross mineral, oil, and gas royalties
Interest.
income (for example, enter (including production payments and
Rent.
deductions allocable to royalties on overriding royalties) and to gross
line 4b, but do not enter more than the income from a working interest in an Line 4d. Certain excluded
gross income from royalties). oil or gas well. interest income. Include:
Also, in figuring adjusted ordinary Depreciation and amortization. Interest on a direct obligation of the
gross income, certain interest income Depletion. United States held for sale by a dealer
is excluded (see the instructions for Property and severance taxes. who is making a primary market for
line 4d below). Interest. these obligations, and
Line 4a. Deductions allocable to Rent. Interest on condemnation awards,
rents. Enter deductions (listed judgments, and tax refunds.

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