The list of questions below leads to pages that answer the most common questions we get from CPA firm clients and from website visitors.
An S corporation may acquire a C corporation in a taxable stock acquisition.
The decision whether to elect QSub stares for the newly acquired C corporation should be examined closely, because the disadvantages of a subsequent sale of the QSub's stock can outweigh the advantages of the flowthrough treatment afforded by the election.
QSub Election Consequences If an S corporation wants to treat its wholly owned domestic subsidiary as a flowthrough entity, it could elect QSub status for the subsidiary on Form 8869, Qualified Subchapter S Subsidiary Election.
The election is treated as a deemed liquidation of the subsidiary into the S parent for Federal income tax purposes.
These “tax-free” “F reorgs” can be a good strategy in some cases, because they offer asset protection, simplified corporate governance and, and in some states, lower state and local franchise taxes.
Tax practitioners should be alert to unexpected potential consequences of an S corporation's acquiring another corporation, electing to treat the target as a qualified subchapter S subsidiary (QSub), and later selling the QSub's stock.In the past, the solutions were complicated, limited and seldom implemented.Now business owners can take advantage of the new “Parent F reorganization” option.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.And it’s easy to see why: S corporation owners can protect themselves against personal liability and have their income and gains taxed only once, as opposed to the double exposure of C corporations and their owners at the corporate level and again on individual returns.