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: The QSUB election can also be made sometime in the preceding year.)

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 might 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 move the assets into a QSUB, 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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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 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. But the election can save the buyer a ton of tax while still maintaining the separate legal existence of the child S corporation. (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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