1
Chapter 8,
Consolidated Tax Returns
2
CONSOLIDATIONS
(1 of 2)
?Affiliated groups
?Advantages & disadvantages of
consolidating
?Consolidated taxable income
?Consolidated regular tax liability
?Consolidated AMT liability
3
CONSOLIDATIONS
(2 of 2)
?Intercompany transactions
?Consolidated dividends
?Consolidated charitable
contributions
?Consolidated NOLs
?Other consolidated items
?Stock basis adjustments
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
5
Affiliated Groups
(2 of 3)
?Excluded corporations
–Tax exempts under § 501
–Insurance companies
–Foreign corporations
–Corporations claiming § 936
possessions tax credit
6
Affiliated Groups
(3 of 3)
?Excluded corporations (continued)
–Regulated investment companies
–Real estate investment trusts
–Domestic international sales
corporations (DISC)
–S corporations
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
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
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
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
11
Consolidated AMT Liability
?AMT prepared on a consolidated
basis for all group members
?Computation parallels
determination of group’s
consolidated taxable income
12
Intercompany Transactions
(1of 2)
?Transactions between corporations
that are group members
immediately after the transaction
13
Intercompany Transactions
(2of 2)
?Examples include,
–Transfers of property
–Performance of services
–Licensing of technology
–Renting of property
–Lending of money
–Payment of a dividend to a parent
14
Transfers of Property
(1 of 2)
?Group members recognize gain or
loss on interco property transfers in
computing separate taxable income
?Interco gain or loss excluded from
consolidated income until a later
event triggers recognition,
15
Transfers of Property
(2 of 2)
?Recognition triggers,
–Buyer claims depreciation,amortization
or depletion on purchased asset
–Amortization of capitalized services
–Departure from the group by either
buyer or seller
–Parent starts a separate return year
16
Other Transactions
?Both parties report their sides of the
transaction in detemining separate
taxable income
?Net effect upon consolidation is zero
?If parties use different methods or
tax years,adjustments to match
income and expense are required
17
Consolidated Dividends
?Dividends received from other
group members are excluded from
consolidated income
?Dividends-received deduction
applied on a consolidated basis for
dividends from non-group member
corporations
18
Consolidated Charitable
Contributions
?The affiliated group’s charitable
contribution deduction is computed
on a consolidated basis
–Sum the individual contributions
–10% limitation based on adjusted
consolidated taxable income
–Carryover the excess for 5 years
19
Consolidated NOLs
(1of 2)
?Consolidating income matches
income from one member with
losses from another,reducing
taxable income
?Carrybacks and carryforwards
done on consolidated basis if group
has not changed its members
20
Consolidated NOLs
(2 of 2)
?Special loss limitations may apply
–Separate return limitation year
(SRLY)
–§ 382 limitation (Loss group)
21
Separate Return Limitation
Year (SRLY) (1 of 2)
?Parent-sub relationship exists
?Subsidiary has been filing separate
returns and has NOLs
?Upon joining group,the sub’s
losses can be used to offset future
consolidated income subject to
limitations
22
Separate Return Limitation
Year (SRLY) (2 of 2)
?SRLY rules also apply to
carrybacks for corps who leave
group and later carryback NOLs to
consolidated years
23
§ 382 Limitation
(1 of 2)
?§ 382 limitation applied when
unrelated corp (or group) added as
a subsidiary and has NOLs
?Limitation determines dollar amount
of loss carryforward from new sub
(or sub group) that can be applied
to reduce consolidated taxable
income
24
§ 382 Limitation
(2 of 2)
?Loss limitation determined by
multiplying the value of the loss
group times the appropriate federal
interest rate
–Loss group value is value of all
common & pref stock owned by
outsiders immediately before change
of ownership
25
Other Consolidated Items
?Adjusted combined taxable income
includes
–All capital gains and losses on current
transactions with outsider
–Net capital loss carryover or
carrybacks
–§ 1231 gains or losses
–Casualty and theft gains or losses
26
Stock Basis Adjustments
?Annually,basis for investment in a
subsidiary corporation is adjusted
?Adjustment parallels the,equity”
method of accounting for
investments but uses tax numbers
instead of book income numbers
27
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Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 8,
Consolidated Tax Returns
2
CONSOLIDATIONS
(1 of 2)
?Affiliated groups
?Advantages & disadvantages of
consolidating
?Consolidated taxable income
?Consolidated regular tax liability
?Consolidated AMT liability
3
CONSOLIDATIONS
(2 of 2)
?Intercompany transactions
?Consolidated dividends
?Consolidated charitable
contributions
?Consolidated NOLs
?Other consolidated items
?Stock basis adjustments
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
5
Affiliated Groups
(2 of 3)
?Excluded corporations
–Tax exempts under § 501
–Insurance companies
–Foreign corporations
–Corporations claiming § 936
possessions tax credit
6
Affiliated Groups
(3 of 3)
?Excluded corporations (continued)
–Regulated investment companies
–Real estate investment trusts
–Domestic international sales
corporations (DISC)
–S corporations
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
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
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
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
11
Consolidated AMT Liability
?AMT prepared on a consolidated
basis for all group members
?Computation parallels
determination of group’s
consolidated taxable income
12
Intercompany Transactions
(1of 2)
?Transactions between corporations
that are group members
immediately after the transaction
13
Intercompany Transactions
(2of 2)
?Examples include,
–Transfers of property
–Performance of services
–Licensing of technology
–Renting of property
–Lending of money
–Payment of a dividend to a parent
14
Transfers of Property
(1 of 2)
?Group members recognize gain or
loss on interco property transfers in
computing separate taxable income
?Interco gain or loss excluded from
consolidated income until a later
event triggers recognition,
15
Transfers of Property
(2 of 2)
?Recognition triggers,
–Buyer claims depreciation,amortization
or depletion on purchased asset
–Amortization of capitalized services
–Departure from the group by either
buyer or seller
–Parent starts a separate return year
16
Other Transactions
?Both parties report their sides of the
transaction in detemining separate
taxable income
?Net effect upon consolidation is zero
?If parties use different methods or
tax years,adjustments to match
income and expense are required
17
Consolidated Dividends
?Dividends received from other
group members are excluded from
consolidated income
?Dividends-received deduction
applied on a consolidated basis for
dividends from non-group member
corporations
18
Consolidated Charitable
Contributions
?The affiliated group’s charitable
contribution deduction is computed
on a consolidated basis
–Sum the individual contributions
–10% limitation based on adjusted
consolidated taxable income
–Carryover the excess for 5 years
19
Consolidated NOLs
(1of 2)
?Consolidating income matches
income from one member with
losses from another,reducing
taxable income
?Carrybacks and carryforwards
done on consolidated basis if group
has not changed its members
20
Consolidated NOLs
(2 of 2)
?Special loss limitations may apply
–Separate return limitation year
(SRLY)
–§ 382 limitation (Loss group)
21
Separate Return Limitation
Year (SRLY) (1 of 2)
?Parent-sub relationship exists
?Subsidiary has been filing separate
returns and has NOLs
?Upon joining group,the sub’s
losses can be used to offset future
consolidated income subject to
limitations
22
Separate Return Limitation
Year (SRLY) (2 of 2)
?SRLY rules also apply to
carrybacks for corps who leave
group and later carryback NOLs to
consolidated years
23
§ 382 Limitation
(1 of 2)
?§ 382 limitation applied when
unrelated corp (or group) added as
a subsidiary and has NOLs
?Limitation determines dollar amount
of loss carryforward from new sub
(or sub group) that can be applied
to reduce consolidated taxable
income
24
§ 382 Limitation
(2 of 2)
?Loss limitation determined by
multiplying the value of the loss
group times the appropriate federal
interest rate
–Loss group value is value of all
common & pref stock owned by
outsiders immediately before change
of ownership
25
Other Consolidated Items
?Adjusted combined taxable income
includes
–All capital gains and losses on current
transactions with outsider
–Net capital loss carryover or
carrybacks
–§ 1231 gains or losses
–Casualty and theft gains or losses
26
Stock Basis Adjustments
?Annually,basis for investment in a
subsidiary corporation is adjusted
?Adjustment parallels the,equity”
method of accounting for
investments but uses tax numbers
instead of book income numbers
27
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
