| A QSub is a subsidiary corporation owned by an “S” corporation. An election must be made to treat the subsidiary corporation as a QSub or the subsidiary will be treated as a taxable “C” corporation.
When a QSub election is made, the separate existence of the QSub is ignored for federal income tax purposes (but not payroll tax purposes) and all of the income and expense of the QSub are treated as income and expense of the ”S” corporation parent.
Making a QSub election for a newly-incorporated subsidiary is a non-taxable event. There is no gain or loss realized or recognized by the QSub or the “S” corporation parent. But this may not be the case if an “S” corporation acquires the stock of an existing corporation and makes a QSub election for such existing corporation.
When an “S” corporation acquires the stock of a corporation and makes a QSub election for such subsidiary corporation, the subsidiary is treated as if it liquidated into the “S” corporation parent. The deemed liquidation will generally be treated as a tax-free subsidiary liquidation. But the subsidiary may be subject to the LIFO recapture tax, and the "S" corporation parent may be liable for built-in gains tax. Built-in gains tax would only apply if the subsidiary was previously a “C” corporation, and the property of the subsidiary that is deemed transferred to the “S” corporation parent was sold within the recognition period. More on built-in gains tax in a future blog.
Please call or email if you want to know more about how or why to set-up QSubs as part of your overall business structure. Jsenney@pselaw.com or 937-223-1130.
AND ONE MORE THING. How long has it been since you had a Legal Audit? The Business attorneys at PS&E would like to meet with you and do a free legal audit of your company. As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk. If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call. Jsenney@pselaw.com or 937-223-1130.
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