QSub Checklist

By the AICPA Tax Divisions S Corporation Taxation Technical Resource Panels Qualified Subchapter S Subsidiary (QSUB) Practice Guide Task Force. The Task Force members are: Gregory A. Porcaro, Chair, Otrando, Porcaro, Pascarella & Gill Ltd., Warwick, RI; Robert W. Jamison, Indiana University, Indianapolis, IN; Stewart Karlinsky, San Jos State University, San Jos, CA; Kenneth N. Orbach, Florida Atlantic University, Boca Raton, FL; Norman S. Solomon, Norm S. Solomon, CPA, Inc., La Jolla, CA.; Deanna Walton, KPMG, LLP, Washington, DC; and Marc A. Hyman, AICPA Technical Manager, Washington, DC.

Sec. 1361(b)(3)(B) defines a qualified subchapter S subsidiary (QSub) as any domestic corporation that is not an ineligible corporation (i.e., certain banks, insurance companies, domestic international sales corporations and corporations claiming a possessions tax credit), if:

1. An S corporation holds 100% of the corporations stock and

2. The S corporation parent elects to treat the subsidiary as a QSub.

Except for certain banks, a corporation for which a QSub election has been made will not be treated as a separate corporation for Federal tax purposeseven though it remains a separate legal corporate entity under state law. Instead, all of a QSubs assets, liabilities and items of income, deduction and credit are treated as belonging to the parent S corporation. The computation of taxable income or loss, built-in gains, passive investment income and other Federal tax items, as well as the characterization of distributions, is generally determined by the parent on an aggregate basis.

Although this provision has been in effect for over seven years, many tax practitioners are still unfamiliar with it. The AICPA Tax Divisions S Corporation Taxation Technical Resource Panel believes that if CPAs better understand the uses and mechanics of QSubs, they will better serve their clients.

The QSub Checklist  has been developed to help achieve this goal; it is part of a QSub Practice Guide available to AICPA Tax Section members at www.cpa2biz.com/ResourceCenters/Tax/S+Corps/default.htm.