Consolidated Tax Return Definition

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Consolidated Tax Return Definition

What Is a Consolidated Tax Return?

A consolidated tax return is a corporate income tax return filed by a group of companies who have decided to disclose their combined tax burden on a single return. The goal of the tax return is to enable companies that do business via several legal affiliates to be treated as a single organization. Capital gains, net losses, and some deductions, such as charity donations or net operational losses, are common items that are merged.

Key Takeaways

  • A consolidated tax return enables related firms to declare their taxes on a single form.
  • This is advantageous for a company that works via many legal companies and may therefore be seen as a single entity.
  • Consolidated items often include capital gains, net losses, and some deductions.
  • The IRS has established several regulations and standards for how affiliate firms may legitimately merge and file.
  • Certain insurance firms, foreign corporations, tax-exempt corporations, regulated investment companies, real estate investment trusts, and S corporations are not permitted to merge.

Understanding a Consolidated Tax Return

A consolidated tax return aggregates the tax liabilities of all companies in a connected group. Companies that are legally authorized to participate in the consolidated group must be includible. Except for certain insurance companies, foreign corporations, tax-exempt corporations, regulated investment companies, real estate investment trusts, and S corporations, every corporation is classified as a includible entity under tax law.

A legally defined associated group is “one or more chains of includible companies linked by stock ownership with a common parent company.” According to the particular tax legislation, this occurs when the parent company holds 80% or more of the voting power and 80% or more of the stock value of at least one of the other firms in the group. Firms in the group must then have 80% of their voting power and stock value held by one or more of the other corporations.

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Electing to File a Consolidated Tax Return

Each linked company must agree to the filing of a consolidated tax return by completing Form 1122 and sending it with Form 1120, the tax form for US businesses. Following that, each new member of the related group must file a combined tax return. Single affiliates may quit the consolidated group without affecting the organization’s standing. The group’s choice to submit combined returns may be difficult to rescind. Once made, the decision is final for all consecutive tax years until the linked group dissolves. The Internal Revenue Service (IRS) may provide approval to end the election.

Process of Filing a Consolidated Tax Return

The parent business submits the consolidated tax return, and all subsidiaries must begin following the parent firm’s tax year. The affiliates must also provide specific information for the combined tax return. They must provide details about their personal taxes, such as taxable income and deductions. Any transactions between firms must thereafter be determined by the affiliates. These transactions may involve lending, renting property, or purchasing or selling commodities or services. Following that, an affiliate must declare its net income or loss, excluding any items that will be merged, in order to calculate their individual taxable income.

After adding up all of the affiliates’ individual taxable income, the combined items are netted across the member firms to get the consolidated taxable income.

Advantages and Disadvantages of Filing a Consolidated Tax Return

Advantages

A consolidated tax return filed by a connected organization may significantly modify its combined total tax burden. A combined return, for example, excludes purchases between affiliated firms and hence no tax is indicated. Deferred taxable profits or losses are recognized upon eventual sale to a third party. One linked corporation’s profits might be used to offset the losses of another. Capital gains and losses may be netted among affiliates, and international tax credits can be pooled.

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Disadvantages

The profit and loss of all affiliates are included when computing the cumulative profits tax, which might be negative since only a single minimum credit amount can be applied. Not only is intercompany revenue delayed, but so are intercompany losses.

As a result, the impact of filing a consolidated return on each member, as well as the associated group as a whole, is complex and should be thoroughly evaluated before making the decision. The connected group should think about its eligibility, total tax burden in comparison to separate filings, and the impact of the election on future years.

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