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Define an Affiliated Group
- A common parent corporation (not an individual) owns. This is a parent-sub relationship
- >80% of the voting power of all outstanding stock AND
- >80% of the value of all outstanding stock of each corp.
An individual owns 100% of each of two corporations. Can those 2 corporations consolidate for tax purposes?
- No. This is a brother-sister relationship
- A corporation who owns 80%+ of another corporation may consolidate, but not an individual owning the corporations
What are the steps for calculating the consolidated taxable income?
- Step 1: calculate each member’s taxable income (TI) as if filing a separate return
- Step 2: adjust each member’s TI to remove inter-member effects
- ++ deferred gain/losses on intercompany sales
- ++ inventory adjustments
- ++ dividends received between members
- Step 3: adjust each member’s TI to remove gains/losses that will be adjusted at the consolidated level
- ++ capital gains/losses
- ++ Section 1231 gains/losses
- ++ net operating loss
- ++ charitable contribution deduction
- ++ dividends-received deduction
- ++ domestic production deduction
- Step 4: combine (consolidate) all TI from the previous steps
- Step 5: adjust the consolidated TI using all items in step 3
True / False: Each member of a consolidated tax group may use different methods of accounting; meaning, one can use the cash method even though the parent uses the accrual method.
- Generally true
- Unless certain threshold limitations apply
True / False: Each member of a consolidated tax group may use a different tax year (fiscal year end).
- Each member must use the parent’s tax year (fiscal year end)
True / False: Each member of a consolidated tax group is jointly and severally liable for the entire consolidated tax liability, tax penalties, and interest.
Members of a group decide to consolidate for tax purposes. With which year must the group begin making estimated tax payment based on the consolidated basis? How can est tax payment be made prior to this year?
- Starting with the 3rd year
- Years 1 and 2 can be made on either a separate or consolidated basis.
What are the advantages of conolidating for tax purposes?
- capital losses of one offset capital gains of another
- intercompany dividends are 100% eliminated
- better utilization of tax deductions and credits
- A NOL carryover may be applied against the income of the group
- Intercompany sales may be deferred
What are the disadvantages of consolidating for tax purposes?
- mandatory compliance with complex regulations
- double-counting of inventory can occur from intercompany transactions
- losses from intercompany transactions may be deferred
- each member must change the tax year to match the parent
- tax credits may be limited
- the election to consolidate is binding for all future years
- states may not allow consolidation meaning different tax records and filings
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