Rules for Consolidated Tax Returns

by Fraser Sherman; Updated September 26, 2017

A group of affiliated corporations can file a single consolidated tax return rather than multiple separate ones. Affiliated corporations are linked by a shared parent corporation and tied together by stock ownership. Filing a consolidated return lets the parent company uses losses from one firm to offset income at another. The accounting can become complex, so some companies opt to stick with separate returns.

Owning the Stock

The Internal Revenue Service test for filing a consolidated return depends on stock ownership. The parent corporation has to own 80 percent of the total stock value and 80 percent of the total voting power in at least one of the affiliated companies. The other companies can be owned either by the parent or one of the other subsidiaries, as long as the ownership hits the 80 percent threshold. Preferred stock and other non-voting stock isn't counted when calculating the 80 percent.

Filing the Paperwork

Each subsidiary company has to file a copy of IRS Form 1122, signed by a corporate officer, with the first consolidated return. The form gives the IRS the company's name, taxpayer identification number and address. The parent company submits Form 851 with every return, listing the subsidiaries and reporting their overpayment credits, estimated tax payments and tax deposits. The parent attaches the forms to its corporate tax return, Form 1120.

Tracking the Money

The parent company has to file supporting statements for each affiliated company. The statement shows items of gross income, deductions and a computation of taxable income. It includes beginning and ending balance sheets for the year, reconciles book income with tax-return income and reconciles retained earnings. The company enters the total income, gains, losses and deductions on Form 1120. If the total receipts and total assets are under $250,000 the parent can skip the balance sheet and reconciliation information.

Number Crunching

Corporations filing consolidated returns gain several benefits. Along with offsetting each others' income and losses, they can offset capital gains against capital losses. Property transfers between affiliated companies don't trigger capital gains; the gain gets postponed until an outside company acquires the property. However if there's a capital loss on the transfer, the company has to defer reporting the loss, too. If it's deferred too long, the loss could expire unclaimed.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.