If I start a subsidiary under an S Corp, will I have to file taxes as one entity or as separate ones? Thanks.?
Answer:
It depends. Subsidiary means that it is owned by the parent, in this case, the S corporation. It can be wholly owned, or predominantly owned. It need not necessarily be an S corporation. It could be a C corporation, in which case, it is a taxPAYER as well as a tax reporting entity. Or, it could be another S corporation, or an LLC. If the subsidiary is a C corporation, then it would be a separate taxpayer and you would have to file separately.
The tax ramifications of a spin-off depend so much on the nature of the subsidiary, the question is too diverse for a reasonable length answer here.
The stock spinoff will be nontaxable. The sub will need a separate tax number so the IRS will be expecting a separate Form 1120-S. All income of sub will be taxed to mother company. That is simple.
You will have to separate the accounting and taxes of the subsidiary since the sub will be a C corp and taxed differently. I would question whether a subsidiary is really necessary. Could you achieve a "spin-off" via specific contracts rather than a separate legal entity?
"Prior to 1997, an S corporations could not have subsidiaries, and could not be a member of an affiliated group of corporations. As of 1997, an S corporation can hold qualifying wholly owned subsidiaries and can own 80 percent or more of the stock of a C corporation. The C corporation subsidiary can elect to join in the filing of a consolidated return with its affiliated C corporations, but the S corporation cannot join in the election."
I believe that for c corps the subsidiary has to be at least 80% owned to file as one. Please research for S corps.
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