A consolidated tax return is a corporate income tax return of an affiliated group of corporations, who elect to report their combined tax liability on a single return. The purpose of the tax return allows for corporations that run their business through many legal affiliates to be viewed as one single entity. Common items that are consolidated include capital gains, net losses, and certain deductions, such as from charitable contributions or net operating losses.
An affiliated group means that a common parent directly owns:
80% or more of the voting power of all outstanding stock, and
80% or more of the value of all outstanding stock of each corporation.
Not all corporations are allowed the privilege of filing a consolidated return. Examples of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts (REITs), some insurance companies, and most exempt organizations.
An affiliated group electing to file a consolidated tax return may substantially alter its combined overall tax liability. For example, a consolidated return ignores sales between connected corporations and therefore no tax is marked. Deferment of taxable gains or losses become realized with the ultimate sale to an outside third party. The income of one affiliated corporation can be used to offset losses of another. Capital gains and losses can also be netted across affiliates and foreign tax credit can be shared amongst affiliates.
Members of the consolidated tax group are generally permitted to continue to use the same accounting methods that were in place prior to filing as a consolidated group. An exception is certain methods which use threshold limitations applied on a consolidated basis, such as the determination of whether a corporation can use the cash method of accounting. Each member of the consolidated tax group must use the parent’s tax year.
To be entitled to file a consolidated return, all the corporations in the group must meet the following requirements:
Be members of an affiliated group at some time during the tax year; and
Each member of the group must file a consent on Form 1122. The election to consolidate (which includes filing the consolidated tax return and attaching Form 1122) must be made no later than the extended due date of the parent corporation’s tax return for the year.
Disclaimer
All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.
TCJA was limits excess business losses for noncorporate taxpayers. Excess business loss is disallowed as a deduction. The loss amount that is disallowed is the aggregate of all trade or business deductions/losses over gross income/gains from such trades or businesses, less a threshold of $250,000 (or $500,000 if married filing jointly; it will be annually adjusted for inflation).
Physical presence was previously the only consideration where income tax nexus is concerned. But this standard was largely replaced by an economic presence/factor presence nexus concept by many states. Just like the sales tax nexus, the income tax nexus better fits the expanding use of e-commerce. States using the economic presence/factor presence nexus standard can impose tax on qualified out-of-state companies, even if they do not have a physical presence in the state.
A corporation's disposing of all (or “substantially all") of its assets, “not in the ordinary course of business," is a fundamental change. Differently, it is not a fundamental change for the company buying the assets. Thus, the shareholders of the buying corporation do not get to vote on the transaction, and do not have rights of appraisal.
Usually, Company combinations are undertaken as a way for one company to acquire another. There are different ways to accomplish this goal. The choice will depend not only on corporate law, but on business and tax considerations. This article will discuss some different ways in which separate business entities may be combined.