Consolidated Tax Return in U.S.
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.
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