What is a Qualified Subchapter S Subsidiary (aka QSUB, aka QSSS)?

A Qualified Subchapter S Subsidiary, also known as a QSUB or QSSS, is simply an S corporation that's owned by another S corporation.

A QSUB is treated as a subsidiary of the parent S corporation. And the really convenient thing is that only the parent S corporation owes a tax return to the federal and state government. (The income and deductions of the "child" S corporation get bundled with the "parent's" income and deductions.)

Making the QSUB or QSSS Election

In order to be treated as a "QSUB" or "QSSS" or whatever you want to call the "child" S corporation, the parent S corporation makes a "qualified subchapter s subsidiary" election using a form 8869 by March 15 of the first year the parent S corporation wants to treat the child S corporation as a QSUB.

Note, too, the QSUB election can also be made sometime in the preceding year.

A Word About Late QSUB Elections

If someone misses the deadline, often (usually?), the QSUB election can be made late as long as you have a good excuse and behaved all along as if you were going to run the child S corporation as a QSUB.

If you are going to make a late QSUB election, you want to locate the current IRS revenue procedure for late elections. (As of late 2017, that means Revenue Procedure 2013-30.)

When to Use a QSUB or QSSS

QSUBs can be useful to know about. If one S corporation acquires another S corporation, for example, you want to explore using the QSUB option for the new subsidiary.

Furthermore, attorneys sometimes like to use QSUBs to move around the assets of a business structured as an S corporation so that no assets drop between the cracks during a sale. (A common technique for selling the assets of an existing S corporation is to sell the S corporation to a new S corporation, make a QSUB election for the "child," convert the QSUB into an LLC, and then sell an interest in the LLC or sell the LLC.)

However, for new startup ventures spawned by a parent S corporation, you would not very often use the QSUB option. You would instead use a single member limited liability company. Here's why: Both a QSUB owned by a parent S corporation and a single member limited liability company owned by a parent S corporation are disregarded and just folded up under the parent for tax accounting purposes.

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If You Don't Make a QSUB Election

A quick tangential point: If an S corporation acquires another S corporation and does not make the QSUB election for the new "child," that child becomes a regular C corporation.

The reason why? The "child's" Subchapter S status gets terminated because an S corporation is not a eligible Subchapter S corporation shareholder.

Probably you would not want this outcome. So be careful about not making a QSUB election... and about forgetting to do a QSUB election.

A Few Words About Sec. 338(h)(10) Elections

A final point about Qualified Subchapter S Subsidiaries... if you ever do purchase an S corporation, you want to know about something called a Section 338(h)(10) election.

Section 338(h)(10) elections allow you to setup a parent S corporation, use that parent to buy a "child" S corporation which you treat as a QSUB, and then allow you to treat the purchase of the "child" S corporation's stock as if instead you've directly purchased the assets owned by the "child" S corporation.

Typically a Section 338(h)(10) election doesn't cost the selling S corporation's shareholders any additional tax as compared to just selling the assets of the S corporation. The selling S corporation records gain on the sale of the assets  and then passes that gain through to their shareholders using the S corporation tax return and the K-1 forms. This gain should be similar to the gain they would have reported if they had simply sold their stock in the S corporation to the buyer.

But the election allows buyer to maintain the separate legal existence of the child S corporation because legally they've bought the stock of the S corporation... while at the same time depreciating or amortizing the assets the Sec 338(h)(10) election says they've purchased.

If you think you might want to make a Section 338(h)(10) election, be sure to confer with a knowledgeable S corporation tax practitioner. Working with QSUBs and Section 338(h)(10) elections can be a little bit tricky.

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