Questions and Answers

Identifying Information:Subchapter S Corporations / Filing Methods
Tax Type:Corporate Income Tax
Brief Description:Subchapter S Corporations / Filing Methods
Keywords:
Effective Date:01/01/1999



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Questions and Answers

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Question:

1. If a parent Subchapter S corporation files a federal consolidated return with a subsidiary Subchapter S corporation(s), and both the parent and its subsidiary(ies) derive all of their income and expenses from sources within Kansas, how should the affiliated group file in Kansas?

2. Under what circumstances should a parent Subchapter S corporation with a subsidiary Subchapter S corporation(s) file a Kansas income tax return using the combined report method?

Answer:

1. When a parent Subchapter S corporation which files a federal consolidate return with a subsidiary Subchapter S corporation(s) and both the parent and its subsidiary(ies) derive all of their income and expenses from sources within Kansas, these corporations should file a Kansas consolidated return for purposes of determining their Kansas income tax liability. [K.S.A. 79-32,142.]

2. If a Subchapter S corporation and its Subchapter S subsidiary(ies) are engaged in a mulitstate unitary business, they should use the combined report method to apportion a percentage of their income to Kansas. If the corporations are not unitary and to not derive all of their income and expenses from sources within Kansas, they should file the Kansas income tax returns on a single entity basis.

Discussion:

Avoiding the double layer of tax (where the net income of a corporation is taxed and then the shareholders are taxed on the dividends) is the prime advantage of electing Subchapter S corporation status. A corporation which has elected to be a Subchapter S corporation for federal income tax purposes is not subject to income tax. Instead, its income is passed through to, and taxed in the hands of, its shareholders. Shareholders may be able to take greater advantage of corporate losses and the tax rate for individuals may be less than the corporate rate.

The tax treatment of a Subchapter S corporation is very similar to that of a partnership. A shareholder’s pro rata share of a Subchapter S corporation’s net income for any tax year depends upon the shareholder’s percentage of stock ownership on each day of the Subchapter S corporation’s tax year.

The Subchapter S corporation election may only be made by small corporations since there is a limit of 75 shareholders. For tax years beginning after 1996, a Subchapter S corporation is permitted to own 80% or more of a C corporation. The Subchapter S corporation parent company cannot file a consolidate federal return with the C corporation.

For tax years beginning after 1996, a Subchapter S corporation is permitted to own a qualified Subchapter S subsidiary. A “qualified Subchapter S subsidiary” is a domestic corporation that qualifies as a Subchapter S corporation and is 100% owned by a Subchapter S corporation parent. [See 26 U.S.C. 1361.] Generally, a parent Subchapter S corporation and a qualified Subchapter S subsidiary are required to file a consolidated federal return. For federal purposes the qualified Subchapter S subsidiary is not treated as a separate corporation.



Date Composed: 02/17/1999 Date Modified: 10/11/2001