Personal Service Activity

Key Information

A personal service activity is a business or trade where the individual's personal skills and reputation play a key role in generating income, rather than capital investment. In simpler terms, the success of the business heavily relies on your unique expertise and services.

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Examples:

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• Professionals: Doctors, lawyers, accountants, consultants, architects, engineers, investment advisors, financial planners, entertainers, athletes.
• Service-based businesses: Hair salons, restaurants, cleaning services, interior design, education services.

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Tax Impact

• Passive Activity Loss Limitation: Personal service activities can be affected by the passive activity loss limitation rule. This rule restricts your ability to deduct losses from these activities against your ordinary income unless you materially participate in the business.
• Personal Service Corporation: If a personal service activity is conducted through a corporation, the corporation may be considered a PSC and subject to special tax rules.

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References

Publication 925 (2022): Passive Activity and At-Risk Rules

IRS Topic No. 419: What are personal service activities?

§ 469 - Passive activity losses and credits limited