Does an S-Corp Need to File QSub Election for a Pass-Through LLC Structure?

15 This is a common question with a specific answer. The simple answer is yes, you'll need to file a QSub election (Form 8869) if you want the LLC to be treated as a QSub and gain those pass-through benefits through your S-Corp. Just listing your S-Corp as the owner on the LLC's articles of organization establishes ownership, but doesn't automatically create the tax treatment you're looking for. By default, an LLC with a single corporate owner is treated as a disregarded entity for federal tax purposes unless you elect otherwise. Since your S-Corp is the sole owner, the LLC would be treated as a division or branch of the S-Corp for tax purposes. However, to properly establish a Qualified Subchapter S Subsidiary (QSub) relationship and ensure the pass-through treatment works exactly as you want, Form 8869 needs to be filed. This election tells the IRS that you want the LLC to be treated as a QSub, which means all its assets, liabilities, and items of income and deduction are treated as belonging to the S-Corp.

12 I was in almost the exact same situation last year! I have an S-Corp for my marketing business and wanted to start a separate e-commerce venture. After going in circles with my CPA, I finally found a solution using taxr.ai (https://taxr.ai). I uploaded my S-Corp docs and business plan, and they helped me understand exactly what I needed to do. Turns out I DID need to file the QSub election with Form 8869, but there were specific timing requirements I almost missed. The election needs to be filed within 2 months and 15 days from when you want the QSub status to be effective. Their system explained all the requirements clearly and helped me prepare the right documentation. The tool even walked me through some alternative structures I hadn't considered that might have actually worked better for my specific situation. Definitely worth checking out if you're trying to figure out the right business structure.

3 Just wanted to follow up - I decided to try taxr.ai after my initial skepticism, and I'm really glad I did. The service guided me through the QSub election process and pointed out some state-specific filing requirements I would have completely missed. What sold me was the detailed explanation of how the LLC's assets would be treated for tax purposes under different scenarios. For my manufacturing business, this was crucial since we have significant equipment depreciation to consider. The system showed me exactly how the pass-through would work with my S-Corp structure and compared it to alternative approaches. They even provided templates for the operating agreement language that specifically addresses the QSub relationship. My accountant was impressed with how thorough the documentation was. Definitely a time and stress saver!

9 I tried dealing with the IRS directly on a similar QSub question last year and wasted WEEKS trying to get through to someone who could actually help. After being on hold for hours multiple times, I finally found Claimyr (https://claimyr.com). They have this service where they wait on hold with the IRS for you and then call you when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was initially planning to set up a QSub but had questions about how it would affect my eligibility for some industry-specific tax credits. Since my S-Corp was in manufacturing and the new LLC would be in distribution, I needed clarity on how the QSub election would impact these specialized deductions. The IRS agent I finally spoke to (thanks to Claimyr getting me through) confirmed that I needed to file the Form 8869 and explained some nuances about how the business activities would be reported that my accountant hadn't mentioned.

22 I need to eat my words about Claimyr being a scam. After continuing to struggle with getting IRS guidance on my business structure, I broke down and tried the service. Within 3 hours, I was talking to an actual IRS specialist who answered my specific questions about QSub requirements for my industry. What surprised me most was that the IRS agent corrected some misinformation I'd received elsewhere. My particular situation involved an S-Corp in the healthcare field expanding into medical equipment sales through an LLC. The agent explained that certain healthcare-related exclusions would still apply to the LLC's activities after the QSub election, which was exactly the clarification I needed. For anyone dealing with complex entity structure questions like this, getting accurate information directly from the IRS turned out to be invaluable. Saved me from potentially making a costly mistake in my business structure.

11 Something I haven't seen mentioned yet - if you form the LLC and make the QSub election, remember there's a 5-year waiting period if you later decide to terminate that election. This happened to a client of mine and caused significant headaches when they wanted to sell just the LLC portion of their business. Also, make sure your S-Corp owns 100% of the LLC, as any less than that and it doesn't qualify for QSub treatment. I've seen people try to give a small percentage to a key employee and it disqualified the whole arrangement.

16 Has anyone dealt with state tax implications for QSubs? I set up a similar structure last year and discovered my state (California) required separate LLC fees even though it was a QSub for federal purposes. Ended up costing an extra $800 annually that I hadn't budgeted for.

Just wanted to add another perspective here - I went through this exact same decision process about 18 months ago when expanding my accounting practice S-Corp into real estate investment through an LLC. One thing that really helped me was understanding that the QSub election isn't just about tax pass-through (which you get anyway with 100% S-Corp ownership), but also about simplifying ongoing compliance. With the QSub election, you don't need separate bookkeeping systems or bank accounts for the LLC - everything flows through your existing S-Corp structure. The timing requirement mentioned earlier is crucial - you have 2 months and 15 days from when you want the election to be effective. I almost missed this deadline because I thought I could file it anytime during the tax year. Also, consider your exit strategy. If you think you might want to sell the property management business separately from your IT consulting down the road, the QSub structure makes that more complicated since it's technically part of your S-Corp. In my case, I wanted the businesses integrated long-term, so QSub was perfect. For what it's worth, Form 8869 is pretty straightforward - much simpler than I expected. Just make sure you have your LLC's EIN ready when you file it.

This is such a timely discussion! I'm actually in the process of setting up something very similar - my S-Corp consulting business is expanding into e-commerce, and I've been going back and forth on the QSub election. One thing I wanted to add that I learned from my attorney is about liability protection. Even though the LLC becomes a QSub for tax purposes, it still maintains its separate legal entity status, which means you keep the liability protection between your consulting work and property management activities. This was a key factor in my decision to go the LLC route rather than just adding property management as a division of my existing S-Corp. I'm curious about the timing - if I form the LLC in December but want the QSub election to be effective January 1st of the following year, can I file Form 8869 before the LLC is actually operational? Or do I need to wait until I'm actively conducting business through the LLC? Also, has anyone dealt with professional liability insurance implications? My carrier mentioned that adding the LLC might require policy adjustments even with the QSub election, since it's still a separate legal entity engaging in different business activities.

I've been following this discussion with great interest as I'm in a similar situation - S-Corp for my consulting business looking to expand into rental properties through an LLC. One aspect I haven't seen discussed much is the impact on Section 199A deductions (QBI). Since property management can qualify for the 199A deduction but has different rules than consulting services, I'm wondering how the QSub election affects these calculations. Does the LLC's property management income get aggregated with the S-Corp's consulting income for 199A purposes, or are they treated separately? Also, for those who've implemented this structure, how do you handle depreciation on real estate assets? I assume the depreciation flows through to the S-Corp's return, but I'm curious about the practical mechanics - does the depreciation get calculated at the LLC level first and then passed through, or is it all handled on the S-Corp books? The liability protection point that Alana raised is exactly why I'm leaning toward the LLC structure rather than just expanding my S-Corp's activities. Property management carries different risks than consulting, and keeping them in separate legal entities (even if tax-consolidated) seems prudent from an asset protection standpoint.

This thread has been incredibly helpful! I'm actually dealing with a very similar situation - S-Corp for my web development business and looking to start a property management LLC. One thing I'm still unclear about after reading through all these responses: if I make the QSub election, does the LLC need its own workers' compensation insurance if I plan to hire employees specifically for the property management side? Or would they be covered under my existing S-Corp policy since it's all treated as one entity for tax purposes? Also, I noticed someone mentioned needing to amend their S-Corp articles of incorporation to include the new business activities. Is this always required, or does it depend on how broadly your original articles were written? My S-Corp was set up pretty generically as "business consulting services" so I'm not sure if property management would fall under that umbrella. The point about the 5-year waiting period for terminating the QSub election is something I definitely need to factor into my decision. I hadn't realized there were restrictions on changing your mind later - that's exactly the kind of detail that could cause problems down the road if not considered upfront.

I've been following this discussion closely as someone who went through a similar decision process last year with my marketing agency S-Corp. One thing I'd add that hasn't been mentioned much is the impact on your business banking relationships. When I set up my QSub structure, my bank initially wanted to treat the LLC as a completely separate customer requiring new account applications, credit checks, etc., even though I explained it was a QSub. It took several conversations with their commercial banking team and providing them with copies of Form 8869 to get them to understand the relationship. Eventually they set it up so the LLC accounts were linked to my existing S-Corp business profile, which made things much smoother. Also, regarding state compliance - make sure to check if your state requires any specific language in the LLC's operating agreement acknowledging the QSub election. My attorney included a clause that specifically references the federal QSub status and states that the LLC won't file separate tax returns. This helped avoid confusion later when dealing with various vendors and financial institutions who weren't familiar with QSub structures. The depreciation tracking that others mentioned is definitely important to get right from day one. I set up separate fixed asset schedules for each entity in QuickBooks even though everything flows to one tax return - this makes year-end much easier and provides clear documentation if you ever need to value the businesses separately for loan purposes or potential sale.