Revenue Notice #13-01: Income and Corporate Franchise Tax – Qualified Subchapter S Subsidiaries (QSSS) – Revocation and Replacement of Revenue Notice # 98-09

Introduction

This Revenue Notice revokes and replaces Revenue Notice # 98-09.

Pursuant to Internal Revenue Code, section 1361(b)(3)(B), a qualified Subchapter S subsidiary (QSSS) is a domestic corporation that is otherwise eligible to be an S corporation and is 100% owned by an S corporation that elects to treat the subsidiary as a QSSS. For federal tax purposes, a QSSS is not treated as a separate corporation and all its assets, liabilities, income, deductions, and credits are treated as assets, liabilities, income, deductions, and credits of the S corporation parent. Minnesota conforms to this federal treatment as described in this revenue notice.

S corporation return

If a QSSS is disregarded for federal tax purposes, then the S corporation parent must file a single Minnesota S corporation return (M8), reporting all assets, liabilities, income, deductions, and credits of the disregarded QSSS as assets, liabilities, income, deductions, and credits of the S corporation parent.

The M8 return requires computation of an apportionment factor pursuant to Minnesota Statutes, section 290.191. In computing the apportionment factor, all property, payrolls, and sales of the disregarded QSSS must be treated as property, payrolls, and sales of the S corporation parent.

Further, to complete the M8 return, the S corporation parent must compute a single minimum fee pursuant to Minnesota Statutes, section 290.0922. In computing the minimum fee, all property, payrolls, and sales of the disregarded QSSS must be treated as property, payrolls, and sales of the S corporation parent.

Shareholders

A shareholder who is not a resident of Minnesota but who is required to file a Minnesota income tax return will be taxed by Minnesota on the Minnesota distributive income of the S corporation. Distributive income of a disregarded QSSS is reported as the distributive income of the S corporation parent. Minnesota distributive income is determined using the apportionment factor discussed above.

The entire income of Minnesota residents is subject to Minnesota income tax.

Signed by Assistant Commissioner Susan Von Mosch and published in the Minnesota State Register on July 29, 2013.