Three-Factor Formula for QSSS Filers

QSSS Filers

If your federal Form 1120S includes a qualified subchapter S subsidiary (QSSS), you must file a single Form M8. However, for computing the minimum fee and allocating income for nonresidents, each entity must compute their own income, deductions, factors and credits separately. Provide a worksheet that separates these items for each entity. Also, attach a copy of Schedule M8A with each entity’s name, address, federal and Minnesota tax ID numbers and include it with the filing.

Resident Shareholders

Under Minnesota law, the entire income of Minnesota residents is subject to Minnesota income tax, regardless of the S corporation apportionment factors.

Nonresident Shareholders

In determining the amount of income to be included on a nonresident shareholder’s Minnesota income tax return, Form M1, a determination must be made as to whether the S corporation parent and the QSSS are engaged in a single unitary business.

Nonresident shareholders will need to know their Minnesota apportioned share of the combined income for those entities that are part of the same unitary business. The weighted three-factor formula determined on M8A must be used to apportion the combined income of the parent and QSSS.

The apportionment formula is computed by adding the apportionment ratios of
all unitary entities with nexus in Minnesota. The numerators of these apportionment factors would include the property, payroll and sales (or receipts) attributed to Minnesota for each entity having nexus in Minnesota. The denominators of the apportionment factors include the property, payroll and sales (or receipts) in all locations for all the entities in the unitary business.

If the S corporation parent or any of the QSSSs are not engaged in a single unitary business, a nonresident shareholder is only subject to tax on an apportioned share of the income earned by those entities that have nexus with Minnesota.

The income from such entities for non-resident shareholders is apportioned to Minnesota using the weighted three-factor apportionment formula determined under M.S. 290.191. A separate apportionment formula is calculated for each entity with nexus in Minnesota. Only the property, payroll and sales (receipts) numerators and denominators for that entity are used to apportion the shareholder’s income for that entity.

Complete a Schedule KS for each non-resident shareholder.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This is also part of a series of posts on S corporation M8 instructions.