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1 Chapter 8: Consolidated Tax Returns
CONSOLIDATIONS (1of2) Affiliated groups Advantages disadvantages of consolidating Consolidated taxable income Consolidated regular tax liability Consolidated AMT liability
2 CONSOLIDATIONS (1 of 2) Affiliated groups Advantages & disadvantages of consolidating Consolidated taxable income Consolidated regular tax liability Consolidated AMT liability
CONSOLIDATIONS (2of2) Intercompany transactions Consolidated dividends Consolidated charitable contributions Consolidated nols Other consolidated items Stock basis adjustments 3
3 CONSOLIDATIONS (2 of 2) Intercompany transactions Consolidated dividends Consolidated charitable contributions Consolidated NOLs Other consolidated items Stock basis adjustments
Affiliated Groups (1of3) Parent must directly own 80% of voting power &80% of total value of stock of at least one subsidiary Parent other group members must own 80% of the voting power 80% of value of each corporation to be included in the group
4 Affiliated Groups (1 of 3) Parent must directly own 80% of voting power & 80% of total value of stock of at least one subsidiary Parent & other group members must own 80% of the voting power & 80% of value of each corporation to be included in the group
Affiliated Groups (2of3) Excluded corporations Tax exempts under§501 Insurance companies Foreign corporations Corporations claiming 8 936 possessions tax credit 5
5 Affiliated Groups (2 of 3) Excluded corporations –Tax exempts under §501 – Insurance companies –Foreign corporations –Corporations claiming §936 possessions tax credit
Affiliated Groups (3of3) EXcluded corporations(continued) Regulated investment companies Real estate investment trusts Domestic international sales corporations(DISC) S corporations 6
6 Affiliated Groups (3 of 3) Excluded corporations (continued) –Regulated investment companies –Real estate investment trusts –Domestic international sales corporations (DISC) –S corporations
Advantages of Consolidating Losses in one member offset gains in another Intragroup dividends are eliminated Combined credit and deduction may avoid carryovers Intragroup gains are deferred Consolidated AMT may reduce the negative effects of AMT adjustments
7 Advantages of Consolidating Losses in one member offset gains in another Intragroup dividends are eliminated Combined credit and deduction may avoid carryovers Intragroup gains are deferred Consolidated AMT may reduce the negative effects of AMT adjustments
Disadvantages of Consolidating Election binding on subsequent years Members must use same tax year Intragroup losses are deferred Intragroup losses may prevent a profitable member from taking credits Additional administrative cost 8
8 Disadvantages of Consolidating Election binding on subsequent years Members must use same tax year Intragroup losses are deferred Intragroup losses may prevent a profitable member from taking credits Additional administrative cost
Consolidated Taxable Income 1. Compute each member's income 2. Adjust each member's income 3. Eliminate certain specified items 4. Combine separate taxable income 5, Adjust combined income for consolidated gains, losses deducts See Table C8-1& Appendix B
9 Consolidated Taxable Income 1. Compute each member’s income 2. Adjust each member’s income 3. Eliminate certain specified items 4. Combine separate taxable income 5, Adjust combined income for consolidated gains, losses & deducts See Table C8-1 & Appendix B
Consolidated Regular Tax Liability Multiply consolidated taxable income by the appropriate tax rate(s)in§11 If affiliated group chooses files separate tax returns, reduced tax rates on lower income apply one time regardless of number of members in group 10
10 Consolidated Regular Tax Liability Multiply consolidated taxable income by the appropriate tax rate(s) in §11 – If affiliated group chooses files separate tax returns, reduced tax rates on lower income apply one time regardless of number of members in group
