Treatment of Qualified Subchapter S Corporations for New York State Conformed to Federal Tax Law

Article excerpt

For tax years beginning after December 31, 1996, Federal tax law permits the creation of qualified subchapter S subsidiaries (QSSS). Following the Federal lead, the New York State Legislature amended the Tax Law to allow for QSSSs, effective for tax years beginning on or after January 1, 1997 (Tax Law section 208(1-B), added by 1997 NY Laws ch 389, pt A, section 45). On September 9, 1997, the New York State Department of Taxation and Finance released a notice detailing the changes in the state tax treatment of S corporations, including those applicable to QSSSs [TSB-M-97 .

A QSSS is a domestic corporation, otherwise eligible for S corporation status, that is wholly owned by an S corporation that elects to treat it as a QSSS. A QSSS is not treated as a separate corporation. Instead, all of its assets; liabilities; and items of income, deduction, and credit are treated as assets, liabilities, and other such items of the parent S corporation. Accordingly, since the QSSS is not treated as a separate entity, it does not make its own S corporation election, does not file a separate Federal tax return, and is not required to have its own taxpayer identification number. As specified in the notice, New York State's QSSS rules are intend ed to conFederal law, largely ignoring the separate existence of the QSSS for purposes of the Article 9-A franchise tax (i.e., assets, liabilities, income, and deductions of the QSSS are reported on the parent's franchise tax return). However, with regard to other New York State taxes, such as sales and excise taxes, a QSSS will be recognized as a separate taxable entity. Further, QSSS treatment is not permitted under Article WA unless both parent and subsidiary are general business corporations that would each separately qualify for taxation under Article WA. …