REG 4 - Consolidated Tax Returns

Question 1

Define an affiliated group for consolidated tax return?

Answer 1

1) 80% or more of the voting power of ALL outstanding stock; AND
2) 80% or more of the value of ALL outstanding stock of each corporation

Question 2

What are the three advantages of filing a consolidated return?

Answer 2

1) Capital losses of one corporation offset capital gains of another corporation
2) Operating losses can offset operating profits of another corporation
3) Dividends of the corporations paid to each other are excludable because they are eliminated

Question 3

What are the five steps in calculating consolidated taxable income?

Answer 3

Step 1) Calculate the stand-alone taxable income of each entity

Step 2) Remove the effects of transactions between members:

• intercompany sales
• inventory adjustments
• dividends received

Step 3) The following gains, losses, and deductions that are determined at the CONSOLIDATED LEVEL are removed:

• Capital gains and losses
• Section 1231 gains and losses
• Net operating loss (NOL)
• Charitable contribution deduction
• Dividends- received deduction

Step 4) Each entity’s taxable income is COMBINED to created the group’s combined taxable income

Step 5) Group’s combined taxable income is adjusted for items in step 3 at the consolidated level