What is a QSub?
By As discussed in my February 2025 blog post Eligible S Corporation Shareholders, corporations generally cannot own the stock of S corporations, even if the owner is itself an S corporation. However, where an S corporation is the 100% owner of another corporation, it can make an election for the subsidiary to be a qualified subchapter S subsidiary (QSub).
Section 1361(b)(3)(A) provides a corporation that is a QSub is not treated as a separate corporation and “all assets, liabilities, and items of income, deduction, and credit of a [QSub] shall be treated as assets, liabilities, and such items (as the case may be) of the S corporation.” That means the S corporation owner of the QSub reports all of the QSubs’s activities on the S corporation parent’s Form 1120S, treating the QSub as a disregarded entity for income tax purposes.
Section 1361(b)(3)(B) defines QSub as any domestic corporation that is not an ineligible corporation if (i) 100 percent of the stock of such corporation is held by an S corporation, and (ii) the S corporation elects to treat the corporation as a QSub. The election is made by the S corporation’s filing Form 8869. The QSub election cannot be effective more than 12 months after the date the election is filed or more than 2 months and 15 days before the date the election is filed. Late election relief generally requires the filing of a private letter ruling request, and the payment of a user fee in accordance with Rev. Proc. 2021-1. Some relief from the ruling and user fee requirements, however, is available under Rev. Proc. 2013-30.
If the QSub election is not made and an S corporation becomes the subsidiary of another S corporation, or if less than 100% of the stock of an S corporation is owned by another S corporation, the S election automatically terminates. The S corporation subsidiary becomes a C corporation. Similarly, even after a QSub election is made, the QSub is treated as disregarded as separate from its S corporation parent only for as long as (i) the S corporation parent continues to qualify as an S corporation, and (ii) the S corporation parent continues to own 100% of the QSub. A sale of any portion of the QSub stock by the S corporation parent terminates the QSub election and results in the QSub’s being a C corporation.
John G. Hodnette is a partner with Fox Rothschild, LLP in Charlotte.