This
informational summary will inform you about the opportunities to use an S
corporation to hold stock of other corporations. S corporations may have
80%-or-more owned C (“regular”) corporation subsidiaries and wholly-owned S
corporation subsidiaries. Thus, taxpayers with S corporations have a great deal
of flexibility in structuring their corporate holdings. Please call if you wish
to explore the use of an S corporation to hold stock of other corporations.
Regular “C” corporation subsidiary. S corporations may have 80%-or-more-owned
C corporation subsidiaries. These C corporation subsidiaries may file a
consolidated return with other C corporations with which they are affiliated.
The S corporation cannot be included in this return, however.
Note
as well that dividends received by the S corporation parent from its C
corporation subsidiary are not treated as “passive investment income” to the
extent they are attributable to the sub's active conduct of a trade or
business. This can help the S corporation avoid the tax on passive income and
the possible termination of its S corporation status that applies to S
corporations with accumulated earnings and profits (i.e., earnings and profits
from a year when it was not an S corporation).
Wholly-owned S corporation subsidiary. An S corporation cannot have a corporate
shareholder. This rule ordinarily prevents subsidiaries from being treated as S
corporations. However, this rule does not apply to qualified Subchapter S
subsidiaries (QSSSs or Qsubs).
Thus, an S corporation can have a QSub if it owns
100% of the subsidiary and makes the required election.
A QSub is not treated as a separate corporation. Instead, its
assets, liabilities, income, deductions, etc. are all
treated as those of the parent S corporation. The sub's accumulated earnings and
profits, passive investment income, and built-in gains are also treated as
those of the parent. Other tax consequences relating to the S corporation sub
can be complex. Please call if you would like us to analyze the benefits and
costs of such an arrangement.
If an
election is made to treat an existing corporation as a QSub,
it will generally be treated as having liquidated in a tax-free subsidiary
liquidation. The tax consequences of this move can be complex and must be
thoroughly analyzed.
If you are interested in
exploring any of these options further, please call.