The election of QSub results in an alleged liquidation of the subsidiary into the parent company. After the liquidation, QSub will not be treated as a separate company and all assets, liabilities and elements of the subsidiary will be treated as assets, liabilities and elements of the company. Suppose instead of buying or building a company`s own subsidiary, there is already a sister-in-law structure. This structure could exist for long-standing S companies that have created additional new S-sister businesses when their businesses grew up before QSubs became available. A final point on subsidiaries qualified as sub-chapter S… If you never buy an S company, you want to know what is called the choice section 338 (h) (10). This trap can be avoided by buying back assets rather than shares in the existing company. If it were an acquired S-Company, an asset step associated with the election of QSub would be available through a joint section 338 (h) (10) election with the selling shareholders.14 In this case, the asset base would have been increased from the transfer base by $100,000 to the purchase price of $1 million, and the existing company would have recognized the $900,000 profit on the profit considered to be the sale value of Company S. If you think you may want to make a choice under Section 338 (h) (10), you should contact a corporate tax S specialist. Working with QSUBs and Section 338 (h) (10) Elections can be a bit difficult. An S parent company uses Form 8869 to treat one or more of its eligible subsidiaries as a qualified subsidiary of Sub-Chapter S (QSub).
The use of a qualified subsidiary of a limited company S (“QSub”) may provide an opportunity for tax planning for the implementation of S companies in separate legal entities, while maintaining the ongoing tax treatment of profits and losses. But if QSub`s transactions are sold, a tax trap could occur if QSub`s stock had been purchased by Company S at a surcharge on the basis of asset taxation. If you identify these pitfalls in advance, S companies can either trade an asset instead of buying shares or adjust the share price accordingly.