Qualified Subchapter S Subsidiary Corporations/Qualified Subchapter S Subsidiary LLC
If you have an interest in making your new Florida corporations a parent subsidiary (where one owns the other) our firm can help you with this. The normal fee is $95.00 dollars per qualification. If you want to take it a step further by having the corporations on one joint tax return we can accomplish this for an additional $85.00 per qualification. We invite you to educate yourself by taking the time to read about some of the tax planning opportunities that exist with regards to setting up a qualified subchapter S Subsidiary.
About 10 years ago the IRS and Treasury enacted regulations on qualified subchapter S subsidiaries (QSSSs). Prior to the new regulations under the Job Protection Act of 1996 (SBJPA), a C corporation that owned 80% or more of a subsidiary could not elect S status. The SBJPA changed that; now C corporations and affiliated groups may elect S status to give them increased latitude to segregate assets and liabilities into separate business lines without creating complex brother-sister relationships, while maintaining a single level of taxation. In addition, an S corporation can now acquire a C corporation without having to immediately liquidate it to maintain S status. Finally, the regulations provide simplified tax reporting; if an S corporation owns 100% of another corporation for which it makes a QSSS election, the Qualified Subchapter S Subsidiary (hereinafter qsss) becomes a disregarded entity. Thus, only one tax return has to be filed for both entities.
After the SBJPA, a C corporation can own 80% or more of another corporation and still elect S status. Further, an S parent doesn't have to elect QSSS status for all of its subsidiaries. However, if QSSS status is desired for a subsidiary, the parent must wholly own the subsidiary. The possibilities are almost infinite, depending on how many subsidiaries there are. The point, however, is that a C parent can own an 80%-or-more subsidiary, elect S status for itself and elect QSSS status for its wholly owned subsidiaries. To summarize this, if an S parent owns an 80%-or-more subsidiary, that subsidiary can be a C corporation, but cannot be a QSSS unless the parent wholly owns it. If the S parent owns 100% of the subsidiary, the QSSS election can be made. The QSSS then becomes a disregarded entity.
An S parent can also own the stock of C corporations. Prior to the SBJPA, an S corporation could not own 80% or more of a C corporation. Now, an S corporation may own any percentage of a C corporation and make a QSSS election for its wholly owned C corporation subsidiaries. However, in the past, an S corporation had to own 79.99% or less of a subsidiary to retain its S status. Now, it may own 80% or more of a C corporation's stock and still retain its S status. In addition, it may choose which subsidiaries it wants to be C corporations or QSSSs. Thus, if an S parent had two subsidiaries, the parent could elect QSSS status for one subsidiary and the other subsidiary could continue its C status. However, an S corporation cannot own a C corporation that retains its C corporation status, and then elect QSSS status for the C Corporation’s subsidiaries. The QSSS-S corporation chain must not be broken.
QSSS eligibility requirements are as follows. A QSSS may only be a domestic corporation, not a foreign corporation. Second, prior to a QSSS election being effective, the S corporation must own 100% of the domestic corporation and must make an election to treat it as a QSSS. In addition, certain domestic corporations may not be treated as QSSSs, under Sec. 1361(b)(2): (1) a financial institution that uses the reserve method of accounting for bad debts, (2) an insurance company, (3) a corporation to which a Sec. 936 election applies (Puerto Rico and possessions tax credit) and (4) a domestic international sales corporation (DISC) or former DISC.
Regarding the Stock issue of a QSSS, there is no requirement that a QSSS have only a single class of stock. As we all know, for an S parent to be an S corporation in the first place, it can have only one class of stock outstanding. For example, an S corporation cannot have outstanding preferred stock. The only difference that may exist between classes of stock is in voting rights. However, a QSSS apparently can have two classes of stock. For example, the parent can own 100% of the QSSS's common stock and theoretically, own 100% of the preferred stock--the corporation would still qualify as a QSSS. This provides for some tax planning opportunities. For example, if there is an eventual plan for the parent to sell preferred stock in the future, the capital structure could be set up without violating the QSSS rules. Thus, A QSSS can have more than one class of stock.
There are many ways to divide an S corporation into natural business lines do not hesitate to call The Law Offices of Nick Spradlin PLLC to make this happen the safest way for your ventures.