What Is a Consolidated Tax Return?
Do you own multiple businesses in the same industry? How about planning an acquisition? If you have companies with similar ownership, you may want to consider filing a consolidated tax return. In this article, we’ll cover the basics of consolidated tax returns, including how to make an election and the pros and cons.
What Is a Consolidated Tax Return?
A consolidated tax return is a corporate income tax return that contains the financial information of multiple affiliated companies. This type of return allows a group of corporations or affiliated entities to report a combined tax liability instead of filing separate returns for each business. All affiliated companies and subsidiaries will be reported on the parent’s tax return.
An affiliated company is a business that is connected through stock ownership with a parent company. The parent company must own 80% or more of the voting stock. All companies are allowed to consolidate except for certain insurance companies, foreign corporations, regulated investment companies, real estate investment trusts, and tax-exempt corporations.
Making the Election to File a Consolidated Tax Return
Before a consolidated return can be filed, each affiliated company must consent to file a consolidated return by filing Form 1122. This form will be submitted with Form 1120. Once an election is made, it is in effect until the entire affiliated group terminates. It’s important to note that it can be difficult to remove a single affiliate from the consolidated tax return without terminating the entire group’s status.
The Consolidated Return Filing Process
After the initial election is made, the parent company will file an annual tax return and report the activities of all subsidiaries. This means that all subsidiaries will follow the same year-end as the parent company. This requirement is only applicable for tax reporting, not financial reporting, as long as the year-end differences are less than three months.
Each affiliate company will be responsible for furnishing tax information to the parent company, including taxable income and deductions. Any intercompany transactions, such as property rent, lending, or goods and services exchanged, will need to be removed. Net taxable income by affiliate is required to be reported. Next, the taxable income of the affiliates will be summed and netted across the member companies to determine consolidated taxable income.
Pros and Cons of Consolidated Returns
The main advantage of filing a consolidated return is the impact on overall tax liability. Consolidated returns can defer taxable gains or losses with the sale to an outside third party, as a consolidated return removes sales between affiliated companies. In addition, the income of one affiliated company can be used to offset the losses of another.
There are also some disadvantages to be aware of. First, the accumulated earnings tax takes the profit and loss of all affiliates, which can be unfavorable as only a single minimum credit is allowed. Moreover, intercompany losses will also be deferred alongside intercompany sales.
Summary
The process of filing a consolidated return is complex, making it important to work with an expert. For help filing your consolidated tax return, reach out to Kislay Shah CPA PC at kislay@shahcpaus.com or 646-328-1326.