Y. 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
100% 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)). North Carolina follows the federal treatment for
income tax purposes and recognizes 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