Consolidated returns are corporate tax return of affiliated groups. These groups elect to report their tax liability of a return. A consolidated income tax return syndicates the responsibility of tax of all includible companies in affiliated groups. A related group may have one or even more chains of particular corporations connected via stock ownership.
These C organizations don’t list tax-exempt, insurance investment managing foreign trusts, investment corporations, and real estate companies. Corporations are working as a part of similar affiliated groups if a mutual parent and each corporation manage almost 80 percent of stock value or voting power of each affiliated group. Several parent-subsidiary controlled groups and corporations may qualify for filing a consolidated return because related groups are brother-sister organizations instead of controlled groups.
The consequence of Choosing to File Consolidated Returns
The affiliated groups choose to file consolidated returns for taxes by submitting an 1120 form. Every affiliated organization should consent to the actual election of 1122 form. After this point, a member of the allied group should join in the consolidated return of income tax. The return lists expenses and income of affiliated member as per single tax and necessary adjustments.
The selection to file a consolidated return may be complicated to revoke. The choice relics is binding on subsequent years of tax until an affiliated group terminates. The IRS can grant permission to discontinue an election.
Pros and Cons of Filing Consolidated Returns
An allied group choosing to file one consolidated return can substantially modify the overall liability of tax. For instance, consolidated returns ignore sales between associated corporations. Postponement of taxable losses or gains realizes with the ultimate sale to a 3rd party.
After recognizing losses, the loss of an affiliated organization may be used to counterbalance revenue of another. The outcome of filing consolidated returns on every member and an affiliated group is complicated. You should consider them carefully before making a decision.
The allied group must consider the eligibility, overall liability of taxes to separate filings and the effect of the election on the future years.
Requirements of Corporations to File Consolidated Income Tax Return
Small business organizations find it easy to form secondary organizations or pick one by acquisition. The IRS doesn’t need corporations to file a consolidated tax return with their subsidiaries. It may not allow you to do this. Before a company may file its consolidated return, it should satisfy particular ownership of stock and elective requirements.
If your corporation can satisfy suitability requirements, you should weigh the pros against the cons of filing a return with some other corporations in which a business has the interest of ownership.
Members of Allied Groups
Corporations that are related to the affiliated group must have an option to file a consolidated return. A group existed when a corporation referred to as a parent organization. It holds stocks to satisfy the value and voting requirements in other corporations. It means that the parent should hold almost 80% value of the outstanding stock of a corporation.
For instance, if your company has 100% of a subordinate that holds nearly 100% of the stock in the third corporation. All these entities are members of the affiliated group and can file a consolidated return.
Tax Returns of Consolidated Corporations
When a parent organization files a Form 1120 for consolidated return, the corporate federal tax return – the financial activity of affiliated members of a group are combined to arrive at a taxable figure of income.
The main advantages of filing one consolidated return are the losses of a corporation may offset the profit of another company. It means less tax is owed by filing a separate return for every member of the corporation. Other important benefits contain removal of intercompany dividends. In several cases, an organization may not owe the ability to take appropriate credits and deductions.
The major disadvantage is that once you file one consolidated return, you have to file a similar return (consolidated return) for each member.
Subsidiaries Should Consent and Authorize
Every subsidiary corporation should consent and authorize to its inclusion in a consolidated return. The consent needs an officer of every subsidiary to furnish the parent company with 1122 form. A parent corporation is responsible for filing consolidated returns.
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