Z. Qualified Subchapter S Subsidiaries

1. Preliminary Statement
   The Federal Small Business Job Protection Act of 1996 allows S corporations to own qualified S corporation subsidiaries, (QSSS). The parent must elect qualified S corporation treatment for its lOO% owned subsidiary. For federal tax purposes, a QSSS is not treated as a separate corporation, but rather all the subsidiary's assets, liabilities, and items of income, deductions and credits are treated as those of the S corporation parent. IRC Section 1361(b) (3) (A).
   
   The North Carolina reference to the Code was updated to January 1, 1997 during the 1997 Legislature. The January 1, 1997 Code included the QSSS provisions. Therefore, effective with tax years beginning after 1996, North Carolina will follow the federal treatment for income tax purposes and recognize all the income and expense items as belonging to the parent corporation. [Reference: North Carolina Technical Advice Memorandum dated August 1, 1997, Qualified Subchapter S Subsidiaries, (CTAM 97-13)]
2. Parent S Corporation Nexus
   All of the subsidiary's activities will be attributed to the parent for purposes of determining whether the parent is doing business in North Carolina.
3. Apportionment Factors
   The S corporation must aggregate and include the subsidiary's items of income, loss, and deductions before determining the parent's apportionable or allocable income. The S corporation parent must also include the subsidiary's property, payroll and sales in determining the parent's apportionment factors.
4. Franchise Tax Returns
   Each QSSS doing business in this State and each parent S corporation doing business in this State must file a separate franchise tax return for each taxable period based on their own separate attributes. The assets, liabilities, income, deductions or credits of the parent and the qualified S corporation are not combined for this purpose. A franchise tax return must be filed even if the resulting liability is the minimum franchise tax.
5. Shareholders
   Shareholders in an S corporation parent with a QSSS doing business in this State must report income attributable to this State in accordance with Division I-S of Article 4 of Chapter 105 of the General Statutes.