How to Use an S Corp Subsidiary

S corporations can turn another S corporation into an S Corp Subsidiary (QSub).

An S corporation, a single-taxed corporation, has assets, deductions, losses and credit passed onto the shareholders of the company. This arrangement has the IRS recording profits and losses from the individual personal tax returns of the shareholders instead of through the corporation, avoiding a double taxation on the corporate income. An S corporation can acquire another S corporation, owning 100 percent of the stock, and elect to turn it into a qualified subchapter S corporation known as a QSub. A QSub can still do business yet will not file a tax return since all profits and losses are combined with the parent S corporation finances. An S corporation can elect to liquidate a subsidiary into the parent corporation by filing IRS Form 8869.

Things You'll Need

• IRS Form 8869: Qualified Subchapter S Subsidiary Election

Instructions

1. Elect to make the S Corp subsidiary into a QSub by filling out page one of IRS form 8869. Write in the information for the parent corporation in the first section. Include the parent corporation name, address, street and room number on line one and subsections. Provide the employer Identification number and the date of the ending tax year on lines two and three.

2. Pen in the service center where you filed the last return on line four. Give contact information of who the IRS can call for more information concerning the application. This will be the officer or legal representative's name and title written in on line five. Include the telephone number of the officer or legal representative on line six. You will have provided all the information necessary regarding the parent corporation.

3. Provide the information regarding the subsidiary in the next section. Write in the basic information such as the name, address and employer identification number on lines seven and eight. Give the date the subsidiary was incorporated, the state of incorporation and the date of election on lines nine through 11.

4. Answer questions about the subsidiary regarding and previously filing made of a federal income tax return. Check either the "Yes" or "No" box concerning the filing on line 12. If you indicated yes, move on to line 13 and complete the information about the service center where the last return was filed, the ending date of the tax year for the return and which tax return form was used: 1120, 1120S or a different form.

5. Indicate on line 14 if the election was made in combination of a reorganization where the subsidiary was an S corporation before the election and a new holding company will become the subsidiary's parent company. Answer whether the subsidiary had filed a last return as part of a consolidated return on line 15. If so, give the name of the common parent along with the employer identification number, the service center where the consolidated form was filed on line 16.

6. Have the officer of the parent corporation sign the form. Provide the officer's title and date.

Tips & Warnings

• Financial institutions with a reserve method of accounting bad debts, taxed insurance companies and domestic international sales corporations cannot qualify as QSubs.

References

• State of California: Franchise Tax Board; Frequently Asked Questions - Qualified Subchapter S Subsidiaries (QSUB)
• Internal Revenue Service: Qualified Subchapter S subsidiary Election 8669 Form
• The Free Library: C Corporations as S Corporation Subsidiaries
• Internal Revenue Service: S Corporations