Regular C corporations can own subsidiaries, either wholly or partially.What about subchapter S corporations?
Can a subchapter S corporation own a subsidiary?The answer is Yes.
The subsidiary is known as a Qualified Subchapter S Corporation subsidiary, or a Qsub for short, after it obtains its own subchapter S corporation status.A Qualified Subchapter S Corporation subsidiary can be merged into its subchapter S corporation parent. The parent must own 100.00% of the qualified subchapter S corporation subsidiary.
The Qualified Subchapter S Corporation subsidiary must also be a domestic entity for this merger to take place.Any entity can become a subchapter S corporation subsidiary except for an insurance company, a Domestic International Sales Corporation and a bank or a thrift institution that utilizes the Reserve Method of Accounting for bad debts.Upon this merger, the subchapter S corporation subsidiary is deemed to be liquidated, with no gain or loss reported on the books of the subchapter S corporation subsidiary.
The Qualified Subchapter S Corporation Subsidiary merges with the parent, and the Qualified Subchapter S Corporation Subsidiary ceases to exist.This treatment is reported to the Internal Revenue Service via an Election on federal form 8869 submitted with the tax return of the parent company. An election filed after March 15 in a tax year will be effective during the next year if filed anytime between March 16 of the current calendar year through March 15 of the following calendar year. Late Election relief is available through the preparation and submission of a Private Letter Ruling.
A private letter ruling, generally, is a memorandum submitted to the Internal Revenue Service for a tax position on a set of facts and circumstances pertaining to the one taxpayer that submitted the private letter ruling.
A user fee must be submitted with the private letter ruling based upon the income of the parent company. It is $ 2,200 if gross revenue for the latest period is less than $ 250,000. The user fee is $ 23,800 for parent companies that have more than $ 250,000 in gross revenue for the latest tax year.A Qualified Subchapter S Corporation Subsidiary election remains in effect until terminated by the parent company or the Internal Revenue Service. A parent corporation can elect Qualified Subchapter S Corporation Subsidiary status again after 5 years, for the same subsidiary, beginning with the year after the year that the election is terminated. Consent from the Internal Revenue Service is required if an election is made by the parent company for a Qualified Subchapter S Corporation Subsidiary for the same subsidiary within those five years.The following is an example.
Accountants on the Land is a subchapter S corporation parent company that has a Cash balance of $ 10,000 as of December 31, 2021; Investment in Subsidiary in the amount of $ 60,000; and Retained Earnings of $ 70,000 as shown on the Balance Sheet below.
Cash and Cash Equivalents $ 10,000
Investment in Subsidiary 60,000
TOTAL ASSETS $ 70,000Retained Earnings $70,000
TOTAL EQUITY $ 70,000
Karmous Enterprises, LLC is a potential subchapter S corporation subsidiary of Accountants on the Land in which Accountants on the Land owns 100.00%. Accountants on the Land received approval of the Election by the Internal Revenue Service on October 01, 2021. Karmous Enterprises, LLC has a Cash balance of $ 50,000 as of 12/31/2021; an Accounts Receivable balance of $ 10,000; and Retained Earnings of $ 60,000.
The following is the Balance Sheet of Karmous Enterprises, LLC as of December 31, 2021
Cash and Cash Equivalents $ 50,000
Accounts Receivable 10,000
TOTAL ASSETS $ 60,000Retained Earnings $ 60,000
TOTAL EQUITY $ 60,000
Karmous Enterprises, LLC was a Single Member Limited Liability Company before it became a Qualified Subchapter S corporation subsidiary of Accountants on the Land on October 01, 2021, the parent company. Karmous Enterprises, LLC is a calendar year taxpayer.On October 01, 2021, in the above example, the newly elected Qualified Subchapter S Corporation subsidiary ceases to exist as a separate entity. Karmous Enterprises, LLC will have to file a final return as a Single Member Limited Liability Company for the short year of January 01, 2021 – September 30, 2021.
The Balance Sheets of both the parent company and the Qualified Subchapter S Corporation Subsidiary, as of December 31, 2021, will merge.The following is the merged Balance Sheet in our example above of Accountants on the Land and Karmous Enterprises, LLC.
Cash and Cash Equivalents $ 60,000
Accounts Receivable 10,000
TOTAL ASSETS $ 70,000
Retained Earnings $ 130,000
Less: Investment in Subsidiary ( 60,000)
TOTAL EQUITY $ 70,000
Please note that the Investment in Subsidiary on the pre-merger Balance Sheet of Accountants on the Land is eliminated because there is no subsidiary anymore due to this merger.
Written By: Angelo Liberati for Accountants On Air