Filing a Consolidated Corporate Tax Return

Posted on May 27, 2024

Filing a corporate consolidated return is a privilege afforded to affiliated groups of corporations. It is possible only if all the affiliated corporations consent to such a filing.

AFFILIATED GROUP DEFINED WITH MEMBERSHIP REQUIREMENTS

An affiliated group refers to a common parent, which directly owns-

• 80 percent or more of the voting power of all the outstanding stock and,
• 80 percent or more of the value of all outstanding stock of each corporation

Affiliated Group Initial Requirements: 

All the corporations in the affiliated group must meet the following requirements-

• To be a member of the affiliated group at some time during the year
• Each member has to file a consent of Form 1122 (Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Tax Return) and Form 1120 (Corporate Tax Return) has be to be attached.
• Such an election has to be made by each member corporation, no later than the extended due date of the parent corporation's tax return for the year.

Corporations that cannot file a Consolidated Tax Return:

Certain corporations are denied the privilege of filing a consolidated tax return and that includes the following-

• S Corporations
• Foreign Corporations
• Real Estate Investment Trusts (REITs)
• Insurance Companies
• Tax Exempt Organizations mostly

Tax Accounting Methods and Periods:

• The IRS permits the member corporations to continue using the same accounting method that were in place prior to filing as a consolidated group.
• However there are certain income thresholds beyond which the IRS requires the corporations to follow the accrual method in place of the cash method. The threshold limitation is applied on a consolidated basis that will prohibit the corporations at the individual levels to use cash versus accrual method.
• The subsidiaries have to use the Parent's year end.

Five-Step Approach in calculating the Consolidated Taxable Income

Step 1: Calculate the stand-alone taxable income of each member of the group, as if the member were filing its own separate tax return.

Step 2: Adjustments are made to each member's taxable income to remove the effects of transactions between members of the consolidated group. These adjustments can be summarized as below:

• Inter-Company transactions where they had gains and losses
• Eliminate the inter-company inventory adjustments
• Dividends received by one member from another member are excluded

Step 3: Gains, losses and deductions that are required to be determined at the consolidated level and this included the following:

• Capital gains and losses
• Section 1231 Gains & Losses (Depreciable Property)
• Net Operating Losses (NOL)
• Charitable contribution deductions, which in corporations is restricted to 10 percent of the taxable income

Step 4: Each member's resulting taxable income from the previous steps is combined to create the group's combined taxable income

Step 5: The Group's combined taxable income is then adjusted for the items that are required to be determined at the consolidated level

Tax compliance requirement

• On Form 1120, we check the box on page 1 indicating that Form 1120 is being filed on a consolidated basis.

Liability for tax

• Each member of the consolidated group is jointly and severally liable for the payment of:
• Consolidated tax liability
• Tax penalties
• Interest

Estimated tax payments

• Estimated tax payments must be made on a consolidated basis starting with the third consolidated tax return year.
• Prior to the third consolidated return year, the estimated tax payments can be computed and paid on either a separate or on a consolidated basis.