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Consolidated Tax Return

Consolidated Tax Return

What is a consolidated tax return?

A consolidated tax return is a corporation tax return for a group of affiliates that choose to report their combined tax payable in one tax return. The purpose of the tax return is to allow companies that operate through several legal subsidiaries to be considered as a single entity. Common consolidated items include capital gains, net losses, and certain deductions, such as charitable contributions or net operating losses.


Understanding a consolidated tax return

A consolidated tax return brings together the tax obligations of all companies included in an affiliated group. Companies legally authorized to be part of the consolidated group must be includable companies. Within the meaning of tax legislation, an includable company is any company other than certain insurance companies, foreign companies, exempt companies, regulated investment companies, real estate investment funds, and S Corps.

An affiliated group is defined as "one or more chains of included companies, linked by shares, with a common parent company." Specific tax legislation defines it when the parent company holds 80% or more of the voting rights and 80% or more of the value of the shares of at least one of the other companies included in the group. Group companies must also have their own voting rights and 80% of the value of the shares held by one or more of the other companies.


Electing to File a Consolidated Tax Return

Each affiliated corporation must give their consent to file a consolidated income tax return by completing Form 1122 and filing it along with Form 1120, the U.S. corporate income tax return. Thereafter, each new member of the associated group must be incorporated in the consolidated income statement. Individual affiliates can leave the consolidated group without the group status being removed. The choice to present consolidated returns may be difficult for the group to reverse. Once made, the choice remains valid for all subsequent years until the end of the membership group. The Internal Revenue Service (IRS) can authorize the suspension of elections.


Procedure for filing the consolidated tax return

The parent company files the consolidated tax return, and all subsidiaries must start after the parent company's fiscal year. Affiliates are also required to provide certain information for the consolidated tax return. This should include your own tax information, such as taxable income and deductions. Affiliates must also establish transactions between companies. These transactions may include loans, real estate leases, or goods or services bought or sold. Therefore, a subsidiary must report its net income to arrive at its separate taxable income regardless of the consolidated items.

Once the separate taxable income of all associated companies is added, the consolidated items are offset between the associated companies, determining the consolidated tax base.


Pros and Cons of the consolidated income tax return


Pros

An affiliate group that chooses to file a consolidated tax return can significantly change its combined general tax liability. For example, a consolidated report ignores sales between affiliates, and therefore no tax is reported. The deferral of taxable profits or losses occurs during the final sale to an external third party. The income of one affiliate can be used to offset the losses of another. Capital gains and losses can also be offset between subsidiaries, and the external tax credit can be shared between subsidiaries.


Cons 

The accumulated earning tax calculation includes all affiliate gains and losses, which can be detrimental as only a minimum amount of credit can be used. And not only profits are carried over between companies, but also losses.

Therefore, the effect of filing a consolidated statement on each member and on the affiliate group as a whole is complicated and should be carefully considered before making a choice. The group to which it belongs must take into account its eligibility, its total taxation under separate deposits, and the effect of the option on future years.


Summary

  • A consolidated tax return allows affiliated entities to report their taxes together in a single tax return.

  • Companies that cannot consolidate include certain insurance companies, foreign companies, tax-exempt companies, regulated investment companies, real estate investment funds, and S Corporations.

  • Consolidated items generally include capital gains, net losses, and certain deductions.

  • It benefits a business that operates through multiple legal entities and can therefore be viewed as a single entity.

  • The IRS has established many rules and definitions on how affiliates can legally consolidate and file.


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Dennis Jao
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