Consolidated Tax Return

What Is a Consolidated Tax Return?

A consolidated tax return is a corporate income tax return of an affiliated group of corporations, who choose for report their combined tax liability on a single return. The purpose of the tax return considers corporations that run their business through numerous legal affiliates to be seen as one single entity. Common things that are consolidated incorporate capital gains, net losses, and certain deductions, for example, from charitable contributions or net operating losses.

Understanding a Consolidated Tax Return

A consolidated tax return joins the tax liability of all includible corporations in an affiliated group. The companies legally permitted to participate in the consolidated group must be includible companies. An includible company, defined by tax law, is any corporation aside from certain insurance companies, foreign corporations, tax-exempt corporations, regulated investment companies, real estate investment trusts, and S corporations.

A affiliated group is legally defined as "at least one chains of includible corporations, associated through stock ownership, with a common parent corporation." The specific tax law characterizes this as where the parent corporation claims 80% or a greater amount of the voting power and 80% or a greater amount of the value of the stock of no less than one of the other includible corporations in the group. Corporations in the group must then likewise have their voting power and value of their stock 80% owned by at least one of different corporations.

Choosing for File a Consolidated Tax Return

Each affiliated corporation must consent to file a consolidated tax return by filing Form 1122 and returning it alongside Form 1120, the tax form for U.S. corporations. After that point, any new member of the associated group must participate in the consolidated tax return. Single affiliates might leave the consolidated group without the group's status being ended. The election to file consolidated returns can be hard to renounce for the group. When made, the decision stays binding on all subsequent tax a very long time until the affiliated group ends. The Internal Revenue Service (IRS) may allow consent to stop the election.

Interaction of Filing a Consolidated Tax Return

The parent company files the consolidated tax return and all auxiliaries must start to follow the tax year of the parent company. The affiliates are additionally responsible for giving certain information to the consolidated tax return. They must rundown their own tax information, like taxable income and deductions. The affiliates must likewise then decide any transactions between companies. These transactions can incorporate any lending, renting of property, or any goods or services bought or sold. Next, an affiliate needs to report its net income or loss, ignoring any things that will be consolidated, to show up at their separate taxable income.

When the separate taxable income of the relative multitude of affiliates is added, the consolidated things are netted across the member companies, deciding the consolidated taxable income.

Benefits and Disadvantages of Filing a Consolidated Tax Return

Benefits

An affiliated group choosing for file a consolidated tax return may substantially modify its combined overall tax liability. For instance, a consolidated return overlooks sales between associated corporations and thusly no tax is stamped. Deferment of taxable gains or losses become realized with the ultimate sale to an outside outsider. The income of one affiliated corporation can be utilized to balance losses of another. Capital gains and losses can likewise be netted across affiliates and foreign tax credit can be shared among affiliates.

Burdens

While computing the accumulated earnings tax, the profit and loss of all affiliates are incorporated, which can be hindering as just a single least credit amount is permitted to be utilized. Furthermore, not exclusively is intercompany income deferred however losses are as well.

In like manner, the effect of filing a consolidated return on every member, and the affiliated group as a whole, are convoluted and ought to be carefully considered before making the election. The associated group ought to consider its qualification, its overall tax liability relative to separate filings, and the election's effect on future years.

Features

Companies not permitted to consolidate incorporate certain insurance companies, foreign corporations, tax-exempt corporations, regulated investment companies, real estate investment trusts, and S corporations.
This benefits a corporation that works through numerous legal elements and can consequently be viewed as one entity.
Things that are consolidated normally incorporate capital gains, net losses, and certain deductions.
A consolidated tax return permits affiliated substances to report their taxes jointly on one return.
The IRS has spread out many rules and definitions regarding how affiliate companies are legally permitted to consolidate and file.