Trap 14 · The subsidiary · From Chapter 9
QSUB: The S-Corp Inside Your S-Corp
A QSUB is a domestic corporation 100 percent owned by an S-corp parent that elects disregarded treatment — its income lands directly on the parent return while it stays a separate corporation under state law.
The requirements
One owner holding 100 percent of the stock, a domestic eligible corporation, and an S-corp parent — then the parent files Form 8869 to elect QSUB status under §1361(b)(3). Individuals and partnerships cannot make the election; only an S corporation can.
Disregarded but real
For federal income tax the QSUB vanishes — its assets, liabilities, income, and deductions are the parent's. Under state law it remains a separate corporation, so liability shields and licenses survive. The parent's own election must stay clean — see terminating the S election for what kills it.
Why bother
Segment liability by line of business, hold separate state licenses, or park an acquisition without a second return — one Form 1120-S covers parent and QSUB. Confirm S election eligibility for the whole group before electing.
Trap questions, answered
- Who can own a QSUB?
- Only an S corporation holding 100 percent of the subsidiary stock — individuals and partnerships cannot make a QSUB election.
- How is the QSUB election made?
- The parent files Form 8869 with the required consent, and the election takes effect on the date specified in the filing.
- Is the QSUB a separate taxpayer?
- No — its income, deductions, and credits flow onto the parent return as if earned directly, while it stays a separate corporation under state law.
The law: 26 U.S.C. §1361 · Full Ch. 9 summary
The other traps: S Election Eligibility · Terminating the S Election · Stock and Debt Basis · Built-In Gains Tax