A personal service activity is any business, possibly a new business, with the primary purpose of providing personal service. Personal service activities span a wide range of professions including law, medicine, engineering, design, finance, accounting, and performing arts. The business offers customers a personal service such as legal advice or medical treatment directly.
Personal service activities are also known as “professional services” or “services”. There is no capital investment required for personal service activities to generate substantial revenue. In other words, the income generated is not passive, but directly from customer service.
Disadvantages of Personal Service Business
- You lose your Small Business Deduction:
your tax rate will increase and you will no longer be treated as a small business company. This may affect your financing.
- Disallowed deductions:
Every cost is accounted for under the law. All miscellaneous costs become tax included and you may not have any tax incentive.
- Penalties and Interest:
Most companies operating as Personal service businesses do so to avoid tax. When the government finds out, they pay heavily. Their interest rates may jump off the roof.