What is a Qualified Subchapter S Subsidiary (QSSS)?

An S corporation is permitted to have a wholly-owned S-Corporation subsidiary. To be treated as a QSSS, the parent corporation files IRS Form 8869 (Qualified Subchapter S Subsidiary Election) pursuant to IRC Sec. 1361(b) (3).  The subsidiary does not file a IRS Form 2553, because a QSSS is not treated as a separate corporation for tax purposes.  See, IRC Section 1361(b)(3)(A)(i).

To make a valid election, four requirements must be met : (1) the subsidiary corporation must be a domestic company; (2) the subsidiary cannot be an “ineligible corporation” within the meaning of I.R.C. ‘1361(a)(2) (i.e., the subsidiary is not a financial institution, an insurance company, a corporation to which an election under I.R.C. ‘936 applies, or a current or former DISC); (3) 100% of the stock of the subsidiary must be held by the parent S corporation; and (4) the parent S corporation must elect to treat the subsidiary as a QSSS. I.R.C. ‘1361(b)(3)(B).

Once a valid QSSS election has been made, the subsidiary will not be treated as a separate corporation for federal income tax purposes. Under I.R.C. ‘1361(b)(3)(A) its assets, liabilities, items of income, deduction and credit (including accumulated earnings and profits, passive investment income, built-in gains, etc.) will be treated as belonging to the parent S corporation.