Converting a C corp to an S corp using a QSub election for earnings distribution?

Does this also apply if the C corp doesn't have much in terms of appreciated assets? Like if it's mostly just cash sitting in accounts from past earnings? And would it make any difference if the S corp was created several years before attempting the QSub election?

Even if the C corp is primarily holding cash, you'd still face tax on the accumulated earnings and profits when making the QSub election. The deemed liquidation treats all assets (including cash) as distributed, triggering the tax consequences. The accumulated E&P is what the IRS is specifically targeting. The timing of when you create the S corporation doesn't really change the outcome. The tax consequence comes from the QSub election itself, not how long the S corporation has existed. The IRS has established these rules specifically to ensure that C corporation earnings don't escape taxation through restructuring.

How does this service work with complex corporate structures? I'm dealing with a C corp holding company with multiple subsidiaries and wondering if something like this could help sort through all the conversion options.

Sounds interesting but I'm skeptical. Did it actually provide actionable advice that a tax attorney wouldn't have caught? And how did you verify the recommendations were legit and not just general information you could find anywhere?

The system handles complex corporate structures really well. You upload your organizational charts and tax returns, and it maps out the entire corporate structure with tax implications for each entity. It was particularly good at identifying the cascading effects of changes across multiple entities. As for verification, I had my CPA review the recommendations, and she was impressed with the analysis. It wasn't generic advice but specific strategies tailored to our situation, including timing considerations for elections and quantified tax impacts. The recommendations included citations to specific IRS rulings and tax court cases that supported the approach.

Wait, this actually works? I've been trying to get through to the IRS for weeks about a different issue. How exactly does this service get you through when the regular phone system just disconnects you? Seems hard to believe.

I'm extremely skeptical this is real. The IRS phone system is designed to limit calls - how could a third-party service possibly bypass that? And even if you do get through, most IRS agents won't give definitive rulings on complex corporate restructuring over the phone - they'll just tell you to consult a tax professional.

It absolutely works! The service uses an automated system that navigates the IRS phone tree and holds your place in line. When an agent becomes available, it calls you and connects you directly to the agent. It's not bypassing anything - it's just handling the waiting for you. You're right that agents won't give official rulings over the phone, but what they provided was information about the proper channels for getting an answer for my specific situation. The agent directed me to the specific IRS guidance and forms needed for my case and explained which department handled QSub election questions. This saved me from proceeding with an incorrect understanding of how these elections are treated.

I've never heard of the Section 1368(e)(3) election - does this let you distribute C corp earnings without triggering the usual double taxation? And would this work only after a standard C to S conversion rather than the QSub approach I was asking about?

The Section 1368(e)(3) election doesn't eliminate taxes on C corporation earnings, but it can help control the timing of when those taxes are triggered. It allows you to specify that distributions come from the Accumulated Adjustments Account (AAA) first, which can be beneficial for tax planning. This would only apply after a standard C to S conversion of the original corporation, not in your proposed QSub structure. The original C corporation would need to make an S election, wait through any applicable built-in gains tax period, and then you could potentially use this election to manage distributions. It's definitely not a way to avoid taxation completely, but it can provide more flexibility in how and when you access those funds.

Honestly, commercial tax software is pretty much useless for complex corporate restructuring. I tried using UltraTax last year for a C to S conversion and it couldn't handle even the basic forms properly. Some things just require professional expertise.

This is really helpful advice, Haley. As someone new to corporate tax issues, I'm curious about the timing you mentioned - how long did you wait between making the C-to-S election and starting distributions? And when you mention "ordering rules for S corp distributions," are you referring to how distributions come from different buckets (AAA vs accumulated E&P) that Elin mentioned earlier? I'm trying to understand if there's a way to minimize the double taxation hit even with the straightforward conversion approach.

Great question about the timing! I waited about 18 months after the S election before taking significant distributions, primarily to get through the built-in gains tax period (which is 5 years but the risk diminishes over time). Yes, exactly - the ordering rules determine whether your distributions come from the Accumulated Adjustments Account (AAA), Other Adjustments Account (OAA), or the accumulated earnings and profits from the C corp days. Distributions from AAA are generally tax-free to you as the shareholder, while distributions from accumulated E&P are taxed as dividends. The key strategy was building up the AAA through S corp operations before touching the old C corp earnings. We also coordinated with salary payments to optimize the overall tax picture. One thing to watch out for - if you take distributions that exceed your stock basis, you could trigger capital gains treatment, which might actually be preferable to dividend rates depending on your situation. I'd definitely recommend getting a tax projection done for different distribution scenarios before making any moves. The math can get complex quickly when you factor in state taxes, net investment income tax, and your overall income picture.