Consolidated Income Tax Returns

June 14, 2024

A group of corporations may elect to file a single consolidated income tax return for the entire group rather than separate returns for each group member. However, this election can only be made if the corporations are affiliated through certain stock ownership. Generally, a group of corporations can elect to file a consolidated return if the group consists of one or more chains of corporations that are connected with a common parent through stock ownership and the following two ownership tests are met:

1. The common parent must directly own at least 80 percent of the voting power and value of the stock of at least one other corporation in the group; and
   

2. One or more corporations in the group must directly own at least 80 percent of the voting power and value of the stock of every corporation in the group (other than the common parent).

The election to file a consolidated return is made by filing a consolidated Form 1120 and attaching an executed Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, for each subsidiary member of the group. Form 851, Affiliation Schedule, must also be attached to the return.

The income tax liability of a consolidated group is based on the consolidated taxable income of the group, which is determined by aggregating the modified separate taxable incomes of the members and then adjusting the aggregate for certain items computed on a consolidated basis.

 Although the taxable income of one or more members of the group may be offset by losses of other members, there are a number of limitations on the use of such losses. The separate return limitation year rules (“The SRLY rule”) apply to such losses.

Under the SRLY rules, when a corporation with net operating loss (“NOL”) joins a consolidated group, the consolidated group can utilize the NOL of the new member only to the extent it contributes to consolidated taxable income. The purpose of this rule is to prevent taxpayers from abusing NOLs.

There may also be other loss limitations that apply based on changes in the ownership of members of the group.

If you have any questions about the rules for filing a consolidated income tax return, please do not hesitate to contact us.