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
Intercompany transactions

3. CONSOLIDATIONS (2 of 2) Consolidated dividends
Consolidated charitable contributions
Consolidated NOLs
Other consolidated items
Stock basis adjustments
Consolidated U.S. production activities deduction

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
Regulated investment companies
Real estate investment trusts

6. Affiliated Groups (3 of 3)
Excluded corporations (continued)
Domestic international sales corporations (DISC)
S corporations
Partnerships and LLCs who choose to be taxed as corps (under check-the-box regs) may be part of an affiliated group

7. Advantages of Consolidating
Losses in one member offset gains in another in the current year
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 of 2)
Compute each member’s income
Adjust each member’s income
Adjustments made to take into account special consolidated treatment
Eliminate any item that is reported on a consolidated basis
Resulting amount is separate taxable income

10. Consolidated Taxable Income (2 of 2)
Combine separate taxable income (STI) of each member
Resulting amount is combined TI
Adjust combined taxable income for items reported on a consolidated basis
Resulting amount is consolidated taxable income (or NOL)
See Table C8-1

11. Consolidated Regular Tax Liability (1 of 2)
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 only one time regardless of number of members in group

12. Consolidated Regular Tax Liability (2 of 2)
Affiliated groups may claim all tax credits available to corporations
Determined on a consolidated basis

13. Consolidated AMT Liability
AMT prepared on a consolidated basis for all group members
Computation parallels determination of group’s consolidated taxable income

14. Intercompany Transactions (1 of 2)
Transactions between corporations that are members of the same affiliated group immediately after the transaction

15. Intercompany Transactions (2 of 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

16. Transfers of Property (1 of 2)
Group members recognize gain or loss on intercompany property transfers in computing separate taxable income
Intercompany gain or loss excluded from consolidated income until a later event triggers recognition.

17. 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

18. Other Intercompany Transactions
Both parties report their side of the transaction in determining 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

19. 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

20. 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
Same as adjusted taxable income for a corporation
Carryover the excess for 5 years

21. Consolidated U.S. Production Activities Deduction (1 of 3)
The affiliated group’s U.S. production activities deduction (CPAD) is computed on a consolidated basis
Lesser of
Consolidated productive activities income or
Consolidated taxable income before STCT deduction

22. Consolidated U.S. Production Activities Deduction (2 of 3)
For purposes of computing CPAD, definition of affiliated group stock ownership threshold is 50% instead of 80%
Lower threshold may require inclusion of corps in this deduction that are not part of the consolidated return.

23. Consolidated U.S. Production Activities Deduction (3 of 3)
Production activities income computed on consolidated basis and then deduction allocated to corps based on relative amount of qualified production activities income

24. Consolidated NOLs (1 of 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
Carryback 2 yrs and forward 20 years

25. Consolidated NOLs (2 of 2)
Special loss limitations may apply
Separate return limitation year (SRLY)
§382 limitation (Loss group)
See Topic Review C8-2

26. Separate Return Limitation Year (SRLY) (1 of 3)
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

27. Separate Return Limitation Year (SRLY) (2 of 3)
NOL allocable to departing member becomes member’s separate CF only after all available carryovers are absorbed in current consolidated return year
NOL CF incurred in SRLY lesser of
Loss member’s income, gain, deduction, and loss minus NOLs previously absorbed for all consolidated return years of group,
Consolidated taxable income, or
Amount of the NOL carryover

28. Separate Return Limitation Year (SRLY) (3 of 3)
SRLY carryover cannot be used when member’s cumulative contribution < $0
SRLY rules also apply to carrybacks for corporations who leave group and later carryback NOLs to consolidated years

29. §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

30. §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

31. Consolidated Capital Gains & Losses
§1231 gains and losses and capital gains and losses computed on a consolidated basis
Eliminated from STI
SRLY and §382 rules apply to capital loss carrybacks and carryforwards

32. 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

33. Stock Basis Adjustments (1 of 2)
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
Adjustments listed on page C8-34.

34. Stock Basis Adjustments (2 of 2)
Large negative basis adjustments can reduce a sub’s stock basis to $0
Negative basis adjustments when sub’s basis is $0 creates an excess loss account
Subsequent positive adjustments reduce (or eliminate) the excess loss account

35. End of Chapter 8
Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business