/
©2011 Pearson ©2011 Pearson

©2011 Pearson - PowerPoint Presentation

sherrill-nordquist
sherrill-nordquist . @sherrill-nordquist
Follow
389 views
Uploaded On 2015-10-15

©2011 Pearson - PPT Presentation

Education Inc Publishing as Prentice Hall CONSOLIDATIONS 1 of 2 Affiliated groups Consolidated tax return election Consolidated taxable income Intercompany transactions Items computed on a consolidated basis ID: 161499

pearson 2011 publishing education 2011 pearson education publishing prentice hall consolidated tax group income separate loss taxable basis affiliated

Share:

Link:

Embed:

Download Presentation from below link

Download Presentation The PPT/PDF document "©2011 Pearson" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.


Presentation Transcript

Slide1

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide2

CONSOLIDATIONS

(1 of 2)

Affiliated groupsConsolidated tax return electionConsolidated taxable incomeIntercompany transactionsItems computed on a consolidated basisNet operating losses (NOLs)

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide3

CONSOLIDATIONS

(2 of 2)

Stock basis adjustmentsTax planning considerationsCompliance and procedural considerationsFinancial statement implications

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide4

Affiliated Groups

Stock Ownership Requirement

Parent must directly own 80% of voting power & 80% of total value of stock of at least one subsidiaryParent & other group members must own 80% of the voting power & 80% of value of each corporation to be included in the group©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide5

Affiliated Groups

Excluded Corporations

Tax exempts under §501Insurance companies under §801Foreign corporations

May elect to treat 100% owned Canadian or Mexican corp as domestic

Regulated

investment companies

Real estate investment

trusts

S corporations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide6

Affiliated Groups

Comparison with Controlled Group Definitions (1 of 2)

Brother-sister controlled groups cannot file consolidated returnsParent-subsidiary controlled groups and parent-subsidiary portion of combined controlled groups can file consolidated returns©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide7

Affiliated Groups

Comparison with Controlled Group Definitions (2 of 2)

Differences between rulesStock ownership for affiliated group is ≥80% of voting power AND valueAttribution rules more strict for affiliated groupsExcluded corporations differAffiliated group definition tests done on each day of the year, not just 12/31

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide8

Consolidated Tax Return

Election (1 of 2)

§§1501-1504Very generalPrimarily define affiliated groups eligible to file consolidated returnStatutory and interpretative Regs used to determine consolidated tax liability and filing requirements

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide9

Consolidated Tax Return

Election (2 of 2)

Termination of consolidated filingTermination of affiliated groupGood cause request to discontinueEffects of former members

Gains and losses deferred on intercompany transactions may have to be recognized under acceleration rule

Consolidated return attributes must be allocated among former group members

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide10

Consolidated Taxable Income

Accounting Periods and Methods

Accounting periodsConsolidated return must conform to parent’s tax yearAccounting methodsEach group member’s method used for separate filing is used for consolidated return

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide11

Consolidated Taxable Income

Calculation (1 of 2)

Compute each member’s incomeAdjust each member’s income

Adjustments made to take into account special consolidated treatment

Remove

any item that is reported on a consolidated basis

Resulting amount is separate taxable income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide12

Consolidated Taxable Income

Calculation (2 of 2)

Combine separate taxable income (STI) of each member Resulting amount is combined TIAdjust combined taxable income for items reported on a consolidated basis

Resulting amount is consolidated taxable income (or NOL)

See Table

1

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide13

Intercompany Transactions

(1 of 3)

Transactions between corporations that are members of the same affiliated group immediately after the transactionMatching ruleConsolidated group treats intercompany item as if both companies were divisions of a single company

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide14

Intercompany Transactions

(2 of

3)Acceleration ruleWhen a member leaves the group, any transaction involving the departing member is fully taken into account

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide15

Intercompany Transactions

(3 of

3)Examples include:Property transactionsPerformance of servicesLicensing of technology

Renting of property

Lending of money

Subsidiary’s distribution to parent

Dividend or redemption

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide16

Property Transactions

(1 of 2)

Group members recognize gain or loss on intercompany property transfers in computing separate taxable incomeIntercompany gain or loss excluded from consolidated income until a later event triggers recognition©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide17

Property Transactions

(2 of 2)

Examples of recognition events:Buyer claims depreciation, amortization or depletion on purchased assetAmortization of capitalized servicesDeparture from the group by either buyer or sellerParent starts a separate return year

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide18

Other Intercompany

Transactions

Both parties report their side of the transaction in determining separate taxable incomeNet effect upon consolidation is zeroIf parties use different methods or tax years, adjustments to match income and expense are required©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide19

Items Computed on a Consolidated Basis

(1 of 2)

Charitable contribution deductionNet §1231 gain or lossCapital gains and lossesDividends received deductionU.S. production activities deduction©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide20

Items Computed on a Consolidated Basis

(2 of 2)

Regular tax liabilityAMT liabilityTax creditsEstimated tax payments©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide21

Charitable Contribution Deduction

The affiliated group’s charitable contribution deduction is computed on a consolidated basis

Sum the individual contributions10% limitation based on adjusted consolidated taxable incomeSame as adjusted taxable income for a corporationCarryover the excess for 5 years

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide22

Capital Gains and Losses

Determined in manner similar as for single corporation

Departing members’ capital lossesRules similar to NOL treatmentDeparting member allocated a portion of capital loss carryover

SRLY limitation for

carrybacks

from separate return year

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide23

Dividends Received Deduction

Dividends received from other group members are excluded from consolidated income

Dividends-received deduction applied on a consolidated basis for dividends from non-group member corporations©2011 Pearson Education, Inc. Publishing as Prentice HallSlide24

U.S

. Production Activities

Deduction (1 of 3)The affiliated group’s U.S. production activities deduction (CPAD) is computed on a consolidated basis

Lesser of

Consolidated productive activities income

OR

Consolidated taxable income before CPAD deduction

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide25

U.S

. Production Activities

Deduction (2 of 3)For purposes of computing CPAD, definition of affiliated group stock ownership threshold is 50% instead of 80%

Lower threshold may require inclusion of corps in this deduction that are not part of the consolidated

return

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide26

U.S. Production Activities

Deduction

(3 of 3)Production activities income computed on consolidated basis and then deduction allocated to corps based on relative amount of qualified production activities income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide27

Regular Tax Liability

Multiply consolidated taxable income by the appropriate tax rate(s) in §11

If affiliated group chooses files separate tax returns, reduced tax rates on lower income apply only one time regardless of number of members in group©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide28

Corporate AMT Liability

AMT prepared on a consolidated basis for all group members

Computation parallels determination of group’s consolidated taxable income©2011 Pearson Education, Inc. Publishing as Prentice HallSlide29

Tax Credits

Affiliated groups may claim all tax credits available to corporations

Determined on a consolidated basis©2011 Pearson Education, Inc. Publishing as Prentice HallSlide30

Estimated Payments

1

st two years option to make on separate or consolidated basisAfter 2nd year must be on consolidated basis©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide31

Consolidated NOLs

Current year NOLs

Carryovers of consolidated NOLsCarryback to separate return yearCarryforward to separate return yearSpecial loss limitations©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide32

Current Year

NOLs

(1 of 2)All members’ income/losses combined Loss from one member offsets income from another member

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide33

Current Year

NOLs

(1 of 2)Carrybacks and carryforwards done on consolidated basis if group has not changed its members

Carryback 2 yrs and forward 20

years

Taxpayer can elect to

carryback

NOL from 2008 or 2009 3, 4, or 5 years

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide34

NOL Carrybacks and Carryovers

NOL Allocated to Members with Separate Loss

©2011 Pearson Education, Inc. Publishing as Prentice Hall

Separate NOL of member

___________

Sum of all separate NOLs

Consolidated NOL

X

=

Portion of consolidated NOL attributable to memberSlide35

NOL Carrybacks and Carryovers

NOL Carryforwards

If corporation leaves the affiliated group, the departing corp takes its share of consolidated NOL with it©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide36

Special Loss Limitations

SRLY (1 of 3)

Parent-sub relationship existsSubsidiary has been filing separate returns and has NOLsUpon joining group, the sub’s losses can be used to offset future consolidated income subject to SRLY limitations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide37

Special Loss Limitations

SRLY (2 of 3)

NOL allocable to departing member becomes member’s separate CF only after all available carryovers are absorbed in current consolidated return yearNOL CF incurred in SRLY lesser of Loss member’s income, gain, deduction, and loss minus NOLs previously absorbed for all consolidated return years of group,Consolidated taxable income, or

Amount of the NOL carryover

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide38

Special

Loss Limitations

SRLY (3 of 3)SRLY carryover cannot be used when member’s cumulative contribution < $0SRLY rules also apply to carrybacks for corporations who leave group and later carryback NOLs to consolidated years

In a reverse acquisition, SRLY limitation applies the acquiring corp’s NOLs

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide39

Special Loss Limitations

§382 (1 of 2)§382 limitation applied when unrelated corp (or group) added as a subsidiary and has NOLsLimitation determines dollar amount of loss carryforward from new sub (or sub group) that can be applied to reduce consolidated taxable income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide40

Special Loss Limitations

§382 (2 of 2)Loss limitation Value of loss group x federal interest rateLoss group value is value of all common & pref stock owned by outsiders immediately before change of

ownership

SRLY

NOL creates deferred tax asset

May be subject to a valuation

allowance

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide41

Stock Basis Adjustments

(1 of 2)

Annually, basis for investment in a subsidiary corporation is adjustedAdjustment parallels the “equity” method of accounting for investments but uses tax numbers instead of book income numbersAdjustments listed on page 35

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide42

Stock

Basis Adjustments(2 of 2)

Large negative basis adjustments can reduce a sub’s stock basis to $0Negative basis adjustments when sub’s basis is $0 creates an excess loss accountSubsequent positive adjustments reduce (or eliminate) the excess loss account

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide43

Tax Planning Considerations

Advantages

of Consolidating (1 of 2)Losses in one member offset gains in another in the current yearIntragroup dividends are eliminatedCombined

credits

and

deductions

may avoid carryovers

Intragroup

gains are deferred

Consolidated AMT may reduce the negative effects of AMT

adjustments

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide44

Tax Planning Considerations

Advantages

of Consolidating (2 of 2)Parent corp (& upper tier corps) increase its bases in subsidiary stock investments for sub’s taxable income, eliminating double taxation

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide45

Tax Planning Considerations

Disadvantages of Consolidating

Election binding on subsequent yearsMembers must use same tax yearIntragroup losses are deferredIntragroup losses may reduces the limitation on certain deductions and creditsAdditional administrative cost

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide46

Compliance and Procedural

Considerations (1 of 2)

Basic election and returnFile Form 1120Including Form 851 affiliations scheduleSubs’ consent to election use Form 1122Must provide a columnar schedule reconciling consolidated income with members’ separate incomes

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide47

Compliance and Procedural

Considerations (1 of 2)

Parent corp acts as agent for groupParent can request IRS consent to treat intercompany transactions on a separate entity basisTax treatment of affiliated groups for state income tax purposes of varies from state to state

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide48

Financial Statement Implications

Intercompany Transactions (1 of 2)

Discussion based on 100%-owned subIntercompany dividendsEliminated for both tax and book whether filing separately or consolidatedIntercompany salesDefers intercompany income for book and tax if filing consolidated returnDeferred amounts may differ

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide49

Financial Statement Implications

Intercompany Transactions (2 of 2)

Intercompany sales (continued)If filing separate returnsSeller recognizes income for tax purposes, but not for financial stmt purposesGroup recognizes deferred tax asset on difference between profit deferred in consolidated financial stmts and taxes paid on seller’s separate tax return

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide50

Financial Statement Implications

SRLY Losses

NOL from SRLY creates deferred tax assetPossibly subject to a valuation allowance©2011 Pearson Education, Inc. Publishing as Prentice HallSlide51

©2011 Pearson

Education, Inc. Publishing as Prentice Hall