Can a Subsidiary Company of a Holding Company File a Separate IRS Return?
A subsidiary company is one that is owned and controlled by another company. The subsidiary operates according to direction from the parent "holding" company, which in most cases either owns the subsidiary outright or has more than 50 percent of the shares of the subsidiary. Subsidiaries may file their own tax returns unless the holding company has an apportionment plan in place, to which all of its subsidiaries must agree.
Subsidiary companies may file their own federal and state tax returns. Alternatively, a holding company may require that a subsidiary allow the parent to file a consolidated tax return, which includes the income of both entities. The Internal Revenue Service does not allow subsidiaries to file a separate return if the holding company is filing a consolidated return with any other company it controls. This prevents the possibility of competing tax returns for the same business and endless wrangles in tax court.
While the IRS allows subsidiaries to file separate returns, the agency also requires Schedule O. This document reports the percentage of taxable income and tax liability of a subsidiary according to an apportionment plan that is set up by the holding company. Holding companies must also file Schedule O if they are filing a consolidated return for all subsidiary companies in the group. The holding company must have the agreement of all subsidiaries on the plan of apportionment to file a consolidated return.
State laws generally follow the lead of the IRS, and allow a subsidiary company to file a state return on its own, or a state-based holding company to file a consolidated return with the agreement of all subsidiaries. In Arizona, for example, the subsidiaries accomplish this by completing and filing the one-page Form 122, which must be signed by an officer of the subsidiary. Form 122 must be filed in the first year in which a holding company elects to file a consolidated return. In general, a state will require any business that earns income, is registered or carries out any business activity within the state to file a business tax return.
Consolidated returns offer some tax advantages for a holding company, which may claim deductions and credits the IRS allows to these subsidiaries to offset taxable income. By the same token, a subsidiary is relieved of the burden of preparing its own tax return, which saves on overhead, and also turns tax liabilities over to the parent. In addition, there may be state-level advantages. For example, Arizona's tax laws grant an additional advantage to state-based holding companies and their subsidiaries. The state levies no corporate franchise tax and no Arizona income tax on dividends received from an out-of-state subsidiary.