Question

Why do companies that file consolidated tax returns often choose to allocate tax expense to the individual affiliates?

Answer 1

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. Each affiliated corporation must consent to file a consolidated tax return by filing Form 1122 and returning it along with Form 1120, the tax form for U.S. corporations. After that point, any new member of the associated group must join in the consolidated tax return. Single affiliates may leave the consolidated group without the group's status being terminated. The election to file consolidated returns can be difficult to revoke for the group. Once made, the choice remains binding on all subsequent tax years until the affiliated group terminates.

Companies who file consolidated tax returns often choose to allocate tax expense to the individual affiliates because The tax liability for one corporation may be higher than the combined tax liability of a consolidated corporation. By having the election to file a consolidated tax return as a group, it helps deter corporations from shifting income to other corporations to minimize tax liability.

Corporations that a part of an affiliated group must comply with Section 1502 of the Internal Revenue Code, and they must be connected through a common parent corporation that owns stock representing 80 percent of the total amount of voting power and 80 percent of the total value of at least one corporation in the group. All corporations in the group must be connected to the common parent corporation through stock ownership.

All corporations are required to file separate tax returns unless the corporations are members of an affiliate group that files a consolidated tax return. The tax liability for one corporation may be higher than the combined tax liability of a consolidated corporation. By having the election to file a consolidated tax return as a group, it helps deter corporations from shifting income to other corporations to minimize tax liability.

Corporations seeking to minimize their tax liability may consider joining an affiliate group of corporations for the purpose of filing a consolidated tax return. The tax liability of the affiliated group is based upon the aggregate income of the entire group, and each member of the group is liable for the total tax liability for the entire group. However, tax credits and deductions for the group can produce lower tax liabilities.