8976 / 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 (see Q 8966), 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.

A QSSS is generally 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 If the S corporation or its QSSS is a bank, special rules provide for the recognition of a QSSS as a separate entity for tax purposes.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 provisions of 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 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. For example, this rule may apply when an S corporation sells all of its QSSS stock to another S corporation, or an S corporation distributes all of its QSSS stock to its shareholders, and the former QSSS makes an S election.⁶