New York qualified subchapter S subsidiary treatment

For federal purposes, a qualified subchapter S subsidiary is not treated as a separate corporation apart from its parent.

All assets, liabilities, and items of income, deduction, and credit of a qualified subchapter S subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the parent S corporation.

In most situations New York will follow the federal qualified subchapter S subsidiary treatment for New York State tax purposes. When the federal qualified subchapter S subsidiary treatment is followed, the qualified subchapter S subsidiary:

• is not considered a subsidiary of the parent corporation;
• is ignored as a separate taxable entity, and the assets, liabilities, income, and deductions of the qualified subchapter S subsidiary are included with the assets, liabilities, income, and deductions of the parent for franchise tax purposes;
• continues to be recognized as a separate corporation for other taxes, such as sales and excise taxes.

Where the federal qualified subchapter S subsidiary treatment is not followed for New York State purposes, the combined reporting rules must still be applied to determine if either the parent, the qualified subchapter S subsidiary, or both should file as distinct members of a combined group on a Form CT-3-A, General Business Corporation Combined Franchise Tax Return.

Filing requirements for a qualified subchapter S subsidiary that is owned by a New York S corporation, a New York C corporation, or a nontaxpayer parent

Parent is a New York S corporation

New York State will follow the federal qualified subchapter S subsidiary treatment. This includes a parent that is mandated to file as an S corporation under Tax Law § 660(i)).

• The parent and subsidiary will be taxed as a single New York S corporation under Article 9-A (and the shareholders of the parent will be taxed under Article 22 personal income tax).
• This treatment will apply whether or not the subsidiary, viewed on a stand-alone basis, is a New York taxpayer.
• The parent (with its qualified subchapter S subsidiary’s activity included) files as a New York S corporation on a Form CT-3-S, New York S Corporation Franchise Tax Return.

Parent is a New York C corporation

New York will follow the federal qualified subchapter S subsidiary treatment if the subsidiary:

• is a New York taxpayer, or
• is not a taxpayer but the parent makes a qualified subchapter S subsidiary inclusion election.

In both instances, the parent and the subsidiary will be taxed as a single New York C corporation (and the shareholders of the parent will be treated as shareholders of a C corporation). The parent (with its qualified subchapter S subsidiary’s activity included) files as a New York C corporation on:

• Form CT-3, General Business Corporation Franchise Tax Return; or
• Form CT-3-A, General Business Corporation Combined Franchise Tax Return, if the combined filing requirements are met with one or more entities (other than the qualified subchapter S subsidiary).

If the subsidiary is not a taxpayer and the parent does not make a qualified subchapter S subsidiary inclusion election, the parent will file as a New York C corporation on a:

• Form CT-3, General Business Corporation Franchise Tax Return; or
• Form CT-3-A, General Business Corporation Combined Franchise Tax Return, if the combined filing requirements are met with one or more entities, one of which could be the qualified subchapter S subsidiary.  In this case, both the parent and qualified subchapter S subsidiary, as separate entities, are subject to the combined reporting rules.  If the parent and qualified subchapter S subsidiary are unitary, they both file as distinct members of a combined group on the same Form CT-3-A.

Nontaxpayer parent

If the qualified subchapter S subsidiary is a New York State taxpayer but the parent is not, New York State follows the federal qualified subchapter S subsidiary treatment if the parent elects to be taxed as a New York S corporation.  The parent makes this election by filing Form CT-6, Election by a Federal S Corporation to be Treated As a New York S Corporation. The parent and qualified subchapter S subsidiary are taxed as a single New York S corporation, and file Form CT-3-S, New York S Corporation Franchise Tax Return.

If the parent does not elect to be a New York S corporation, the qualified subchapter S subsidiary (without its parent’s activity included) must file as a New York C corporation on a: 

• Form CT-3, General Business Corporation Franchise Tax Return; or
• Form CT-3-A, General Business Corporation Combined Franchise Tax Return, if the combined filing requirements are met with one or more entities, one of which could be the qualified subchapter S subsidiary.  In this case, both the parent and qualified subchapter S subsidiary, as separate entities, are subject to the combined reporting rules.  If the parent and qualified subchapter S subsidiary are unitary, they both file as distinct members of a combined group on the same Form CT-3-A.

Exception: excluded corporation

Notwithstanding the above rules, qualified subchapter S subsidiary treatment is not allowed when the parent and qualified subchapter S subsidiary file under different Articles of the Tax Law (or would file under different Articles if both were subject to New York State franchise tax). In this case, each corporation must file as a distinct entity under its applicable Article, subject to Article 9-A or Article 33 combined reporting rules, as applicable.

The election can be made by completing Form CT-60, Affiliated Entity Information Schedule, and attaching it to your franchise tax return (CT-3, CT-3-A, CT-3-S).

• The election is effective for the tax year for which the election is made and for all succeeding tax years of the corporation until the election is terminated.
• If you elect to include a qualified subchapter S subsidiary, you must also include any lower tier qualified subchapter S subsidiary owned by that qualified subchapter S subsidiary.
• You are required to complete Part 2 of Form CT-60 to make the election, and you are required to complete Part 2 for each succeeding tax year for which you wish the election to be effective.

If a qualified subchapter S subsidiary for which the election had been made in a previous year is not included in Part 2 of Form CT-60, it indicates termination of the election.