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Dear Tax Talk,
Can 1 S corp buy another? — Goldie
Dear Goldie,
An S corporation is a regular corporation under state law that has elected under the income tax rules to be taxed under Subchapter S of the Internal Revenue Code. An S corporation is also referred to as a Sub-S, because of the subchapter, not because of subsidiary status. An eligible corporation can make an S corp election by timely filing Form 2553. There are detailed criteria for eligible S corps.
An S corp cannot:
A. Have more than 100 shareholders.
B. Have as a shareholder a person who is not an individual (except an estate or certain trusts).
C. Have a nonresident alien as a shareholder.
D. Have more than one class of stock.
The acquisition of shares of another S corporation by an S corporation will result in the prohibition under (b) above. Therefore, the answer to your question is no, an S corporation cannot own shares of another S corporation without voiding the acquired S corporation’s Sub-S election.
An exception exists that allows an S corporation to own 100 percent of another S corporation. In this case, the subsidiary is ignored as a separate entity for income tax purposes and all its income and expenses are included as part of the parent company’s tax return without distinction. So the real answer to your question is none or all.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.
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