S-Corp CPA Firm & Q-Sub

Technical topics regarding tax preparation.
#1
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I own two companies, one is a small IT firm that also holds nearly all the assets used in my businesses. My second company, the CPA firm, is a spin-off of the other company for legal reasons (business partnership gone bad, and I wanted to 100% break any agency the public may have perceived my former partner as having). Both are LLCs with Sub-S elections.

I need to actually reach someone at LLR to ask if this is even allowed in my state (it is--the question is does SC LLR allow a CPA firm to have a subsidiary, let alone in a different industry), but does anyone see any critical tax issues if I had the CPA firm acquire 100% of the IT firm and made a Q-Sub election? The revenue split still puts the CPA firm making 95% of the money, so I am fine on that front with LLR. The way the IT firm is structured and managed, it is certainly sideline and intentionally barely turns a profit...I am also not concerned about not getting a stepped up basis in the assets.
 

#2
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What does "LLR" refer to?
 

#3
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Harry Boscoe wrote:What does "LLR" refer to?


Labor, Licensing, and Regulation. They handle professional licensing in South Carolina, among other things.
 

#4
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Does anyone have experience in dealing with a Q-Sub? The concept itself is simple enough but I have never dealt with one.

-Parent company (CPA firm, LLC with Sub-S) owns (acquires) 100% of another S-Corp that is treated, for tax purposes, as a subsidiary (including by state, which recognizes Federal elections)
-Parent company does not receive a stepped up basis in subsidiary assets
-All financial matters of subsidiary are reported on parent company's 1120S
-Deemed liquidation to parent company, but not a taxable event until potential sale of subsidiary (subsidiary will likely NOT ever be sold, in this case)
-Subsidiary ceases to exist as a tax entity except for employment and sales/use tax purposes
-Minimal acquisition value, subsidiary is basically holding company at this point and assets and liabilities are largely equal

So, other than filing a short-year final return for the subsidiary and filing form 8869 for the Q-Sub election, does anyone have advice on transferring the assets and liabilities into the parent company's tax return? Or simply carry them over at short-year final return values? Am I overlooking anything? I tried bouncing this off a 30+ year CPA and he had never heard of a Q-Sub... :(
 

#5
sjrcpa  
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I'd keep separate books for the QSUB. Then "consolidate" them for tax return reporting at year end.
Our TB software will do a consolidation.
 

#6
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sjrcpa wrote:I'd keep separate books for the QSUB. Then "consolidate" them for tax return reporting at year end.
Our TB software will do a consolidation.


I know what you're saying, and yes, they would still maintain separate books but everything would roll up into the parent company's 1120S. I can consolidate the two companies very quickly for reporting purposes.

I guess the real question I have is since making the Q-Sub election is a deemed liquidation, but it is not actually a taxable event at the moment, what is the best practice for handling the deemed liquidation within the tax software? I use UltraTax. I am the sole owner of what will become the subsidiary; I'd hate to unknowingly create a tax pitfall because I overlooked something that may be obvious. I have not seen anything in UT where I could indicate the subsidiary will become a Q-Sub, but I do see where the parent company can indicate a Q-Sub.
 

#7
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"-Deemed liquidation to parent company, but not a taxable event until potential sale of subsidiary (subsidiary will likely NOT ever be sold, in this case)"

Yeah, the assets, liabilities, income and expenses of the Q-Sub are treated as if they belong to the "parent" S corporation, but I've never thought of getting them there by a "deemed liquidation."

Where does that idea come from?
 

#8
Nilodop  
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From reg. 1.1361-4(a)(2).
 

#9
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Based on "deemed liquidation," when it actually is NOT a liquidation but the parent company receives the assets at same basis as current entity/subsidiary, I cannot seem to wrap my head around how this would be handled on the acquired company/subsidiary's final 1120S given there would need to be a final K1, too. Typically, the liquidation would be to me at FMV unless I sold the assets to another party. Since the assets are basically all that the parent company would be buying of value, just allocate acquisition price to the various assets rather than to myself? I am just not certain how to prevent the tax software (UT) from creating a taxable event in this situation, when the IRC does not call for a mere Q-Sub election and transfer of assets to be a taxable event AT THE MOMENT.
 

#10
Nilodop  
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What's confusing one of us (you or me) is that you keep referring to a liquidation "to you at FMV". If I understand what you did (or will do), the steps are a contribution of the second S corp. to the first S corp., treated for tax purposes under section 351 (and maybe 357, depending on liabilities), followed by a deemed liquidation of the second into the first, treated under sections 332 and 337. There's no distribution or liquidation to you, and everything is tax-free.
 

#11
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Nilodop wrote:What's confusing one of us (you or me) is that you keep referring to a liquidation "to you at FMV". If I understand what you did (or will do), the steps are a contribution of the second S corp. to the first S corp., treated for tax purposes under section 351 (and maybe 357, depending on liabilities), followed by a deemed liquidation of the second into the first, treated under sections 332 and 337. There's no distribution or liquidation to you, and everything is tax-free.


It's me causing confusion. How is this done in UltraTax with entity that will become the Q-Sub? To me, the assets will no longer be listed on the final 1120S of the acquired company (which will be the Q-Sub). Do I just mark them as sold to a related party (since I own both companies) at current basis, and then add them to the 1120S of parent company at same values?

Like I said, in theory this is a simple thing to do for these two entities. I just want to make sure I have my ducks in a row by not overlooking something that could cause me unnecessary tax headaches with final K1, since the S-Corp to become the Q-Sub is currently owned by me, individually. I am a bit baffled I cannot seem to find a local CPA that has worked with this, especially ones that have 20+ years more experience than I do. Likely, I am overthinking it.
 

#12
sjrcpa  
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CornerstoneCPA wrote:Do I just mark them as sold to a related party (since I own both companies) at current basis
If that's what it takes in your software to get to a no taxable event situation.
 

#13
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I have one Q Sub. However, my client formed a new corporation to purchase an existing business and then elected Q Sub status. It was not a related entity that was purchased, and I was not concerned with the tax reporting of the entity that was purchased, so I am of no assistance there. I did struggle with the bookkeeping initially for the set up, but think I finally have everything set up correctly. I show the purchase of the Q Sub stock as an investment on the Parent Co. books, and that amount increases/decreases with the profit/loss of the Q Sub each year.

We do keep two separate sets of books, and then combine them for the tax return. We elected to be a Q Sub for liability purposes, as well as for basis purposes. The subsidiary normally has a loss, where the Parent Co. usually has a profit.
 

#14
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Ok, resuming this topic. It is my understanding a final 1120S has to be filed to the company that is now the QSub. The extended deadline is March 15th, and I have not really thought about it since August.

To summarize, Company A had net of accumulated depreciation asset value of $25,160, and debt of about $14,400. This was netted for a purchase price of 100% of my stock by Company B (which I wholly own). At the moment, it is to be treated as a tax free transaction per IRC, and Company A assumes the assets at their carrying value when it files 2018 Form 1120S. Company A paid me the determined purchase price in exchange for 100% of stock.

I am struggling with the final 1120S for Company A, balance sheet simply is not working out and no loss is available since it is a related party transaction. I read some suggestions to just file a final 1120S consisting entirely of zeros, and roll everything into Company B's 2018 1120S--income, expenses, basis, EVERYTHING. The latter approach is sure simple, but seems incorrect. The correct approach seems to be to do a mass disposition of all assets for the acquisition price, but that is where i then end up with a balance sheet on the tax return that simply does not work.

Thoughts?
 

#15
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For Company A to be a QSub, Company B has purchased its stock. This doesn't have anything to do with the assets of Company A.

Alternatively, you could have contributed Company A's stock to Company B and made the QSub election on the same day.

Either way, there has not been and should not be an asset sale accounted for. Further, I would not suggest checking 'final' on the last Company A 1120S. You're not liquidating the entity and Form 8869 tells the IRS what you've done. Just file the return representing assets and liabilities as of the YE date.
~Captcook
 

#16
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Why would you suggest against marking Company A return as final? If it is QSub, everything I have found indicates a final return needs to be filed despite Form 8869.
 

#17
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CornerstoneCPA wrote:Why would you suggest against marking Company A return as final? If it is QSub, everything I have found indicates a final return needs to be filed despite Form 8869.


It's a deemed liquidation, not an actual liquidation, and, most likely, tax-free.
You're not shutting down the EIN. You could use it in the future and may have need for it for payroll purposes. By checking 'final', you run the risk of the IRS closing the account on their end, which may prove problematic.

You may have read that a 'final' return needs to be filed, as in, there will be no further returns filed (at least until the QSub election is revoked). However, have you read that the 'final' box needs to be checked?

Form 8869 communicates to the IRS what is going on with the entity and why they won't receive future 1120S filings. Checking the 'final' box communicates that too, but adds the implication that the entity is no more. I, similarly, don't check the 'final' box on an 1120 for a C-corp electing 'S'. Same principle here.
~Captcook
 

#18
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Gotcha. The guidance and code on QSubs is not exactly clear.

So filing short year as if it were to continue for sake of keeping EIN open, but Form 8869 indicates no further returns should be expected until QSub is revoked, and everything rolls into Company B as of effective date of QSub election. Simple enough.
 


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