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
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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