Dear Tax Talk,
Can 1 S corp buy another?
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