7779 / What is a qualified subchapter S subsidiary (QSSS)?

An S corporation may own a qualified subchapter S subsidiary (QSSS). A QSSS is a domestic corporation that is not an ineligible corporation, if 100 percent of its stock is owned by the parent S corporation and the parent S corporation elects to treat it as a QSSS. Except as provided in regulations, a QSSS is not treated as a separate corporation, and its assets, liabilities, and items of income, deduction, and credit are treated as those of the parent S corporation.¹ Regulations provide special rules regarding the recognition of a QSSS as a separate entity for tax purposes if an S corporation or its QSSS is a bank.² A QSSS will also be treated as a separate corporation for purposes of employment taxes and certain excise taxes.³ For tax years beginning after 2014, a QSSS will be treated as a separate corporation for purposes of the shared responsibility payment under the Affordable Care Act.⁴

If a QSSS ceases to meet the above requirements, it will be treated as a new corporation acquiring all assets and liabilities from the parent S corporation in exchange for its stock. If the corporation’s status as a QSSS terminates, the corporation is generally prohibited from being a QSSS or an S corporation for five years.⁵ Regulations provide that in certain cases following a termination of a corporation’s QSSS election, the corporation may be allowed to elect QSSS or S corporation status without waiting five years if, immediately following the termination, the corporation is otherwise eligible to make an S corporation election or QSSS election, and the election is effective immediately following the termination of the QSSS election. Examples where this rule would apply include an S corporation selling all of its QSSS stock to another
S corporation, or an S corporation distributing all of its QSSS stock to its shareholders and the former QSSS making an S election.⁶

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1. IRC § 1361(b)(3).

2. Treas. Reg. § 1.1361-4(a)(3).