In response to meetings with the AVMA in Washington, DC, this fall, the IRS has delivered a letter to the AVMA clarifying the criteria by which C corporations become qualified personal service corporations (QPSC).
The letter spells out ways in which a corporation might fail one or both of the tests for QPSC status, thereby being able to remain a C corporation. C corporations are currently taxed at a graduated rate beginning at 15 percent and rising to 35 percent, whereas QPSC are taxed at a flat 35 percent rate.
In the letter, the IRS states that if nonemployee spouses, parents, or children own more that 5 percent of corporate stock, the corporation would fail the QPSC ownership test. Regarding the function test, the IRS confirmed that this is based on time spent by employees, rather than percentage of income.
The letter broadens the definition of nonprofessional activities, however, to include retail sale of pet supplies or medications, and boarding and grooming of animals not under the veterinarian's medical care. If more than 5 percent of time falls into these activities, the function test is failed. Reasonable records would be required to verify time spent in these areas.
The text of the IRS letter may be found at www.avma.org/grd/news.asp. Practitioners wishing to consult this information for their year-end tax planning should take this letter to their tax advisers for further consideration.
The IRS letter, along with commentary from the AVMA-GRD, will be featured in the "Small Business Concerns" section of the Jan 1, 2001 JAVMA.