An affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses.
Requirements
To be entitled to file a consolidated return, all the corporations in the group (i) must have been members of an affiliated group at some time during the tax year and (ii) each member of the group must file a consent. Note that the act of filing a consolidated return by all the affiliated corporations will satisfy the consent requirement.
Affiliated Group Defined
An affiliated group means that a common parent owns: 1) 80% or more of the voting power of all outstanding stock and 2) 80% or more of the value of all outstanding stock of each corporation.
Brother-Sister Corporations
Corporations where an individual (not a corporation) owns 80% or more of the stock of two or more corporations, may not file consolidated returns.
Advantages of Filing Consolidated Return
Among the advantages of filing a consolidated return are:
- Capital losses of one corporation offset capital gains of another corporation;
- Operating losses of one corporation offset the operating profits of another corporation; and
- Dividend received are 100% eliminated in consolidation since they are intercompany dividends.
- A corporation's NOL carryover may be applied against the income of the consolidated group.
Disadvantages of Filing Consolidated Return
The disadvantages of filing a consolidated return include:
- Mandatory compliance with complex regulations;
- In the initial consolidated tax return year, a double counting of inventory can occur if group members had intercompany transactions;
- Tax credits may be limited by operating losses of other members; and
- The election to file consolidated returns is binding for future years and may only be terminated by disbanding the group or seeking permission of the Internal Revenue Service.
