Acquiring an S Corp business and converting to a QSUB, anything to consider when structuring the purchase?

[brchiz]

I own an S Corp which owns two LLCs that passthrough to the S Corp tax return. I am looking to purchase two additional businesses that are currently stand-alone S Corps. I would like them to also passthrough to my parent company S Corp. From my research, it sounds like as long as the parent S Corp owns 100% of the shares of each of the new S Corps, I can file form 8869 after the acquisition to obtain QSUB status. I have two questions about this, first, how would we handle a mid-year election since the acquisitions are both scheduled to close on 3/31/2021? Second, the seller will be carrying the contract on two businesses and will hold them as collateral. They are concerned about our intent to convert them to a QSUB should there be a default and they need to take the businesses back. If this were to happen, wouldn't all shares just transfer back to them from the parent S Corp and they would continue to file a separate tax return as they do today? Any other thoughts or recommendations on this structure would be much appreciated.

[M-MTax]

You need a tax lawyer but there can be prorations if the closing is other than at the end of the tax year. If the business are taken back the tax filing wouldn't have an effect on your election so I don't see a problem there BUT you SHOULD KNOW that buying shares in a private corporation is often a BAD idea......liabilities attach and often some bad things can happen......better to buy assets instead. See a lawyer and a tax pro.

[Mike9241]

you should really consult a pro.  there really is no need for your present S Corp to buy the new S-Corps but then maybe there's something you haven't told us which would change my answer.  by the way, buying an S-Corp stock is many times the worse way to buy a business.  let's say the FMV is $50 but the S-Corp you're buying has an inside tax basis of $20.  you get no benefit from the exr=tra $30. at least not immediately. a pro would advise buying the assets. then you get them at $50 and if they're depreciable you get to write off the $50. you can't do this if you buy the stock.   another issue with buying stock, undisclosed liabilities follow the s corp. so while they want protection if you default what protection do you get if there are undisclosed liabilities like a lawsuit.