Z. Qualified Subchapter S Subsidiaries
- 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)]
- 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.
- 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.
- 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.
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.