When a S-Corp buys another corp and changes its status to S too, how will the parent corp be taxed?

Question

I wanted to know if a person owned a s-corp and bought a aged corp with good credit and used it to obtain the funding it needs to invest in like real estate how will the profits be funneled to the parent corp be taxed. I know that an s-corp's income is not taxed while the employees are taxed on the pass thru income. My question is is the profits from subsidiary s-corp passed up to the parent s-corp tax free until its passed to its employees?

Answer 1

Tax effects of mergers and acquisitions is a tricky area of law. Generally, if you make a Q-sub election (qualified Subchapter S subsidiary) for a subsidiary of an S corporation, then for tax purposes it is as if the subsidiary does not exist and all the income would flow through the parent company S Corp to its shareholders. However, you really need someone who knows the tax laws to look at your particular situation because the tax code contains tons of exceptions to every rule, especially if you have a corporation that in previous years was a C-Corp.

Answer 2

an S corp may not be owned by another corp. Such a purchase or merger would terminate the S corp status.

Now, an S corp may, I believe, purchase a regular corp and merge it into itself.

However, essentially the same thing might be accomplished by converting to a different corporate structure -- I believe an S corp can own an interest in an LP or LLC, for example.

I suggest that you need competent assistance with this tax/legal question, probably someone located in your state.


GL

Answer 3

There are certain requirements that have to be met to be an S-Corp and to maintain S-Corp status.

For example, no more than 100 shareholders and the shareholders must be US Citizens or residents.

If by merging the other corporation, you now have more than 100 shareholders, or even 1 of them is not a US citizen or resident, you will lose your S-Corp status.

But then, there are many other requirements to maintain S-corp status, you have to still be in compliance with all of them.

Definitely consult a corporate attorney and a tax expert.