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[PPT]Chapter 8: Consolidated Tax Returns - Pearson...
Transcript of [PPT]Chapter 8: Consolidated Tax Returns - Pearson...
8-1©2011 Pearson Education, Inc. Publishing as Prentice Hall
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CONSOLIDATIONS(1 of 2)
Affiliated groupsConsolidated tax return electionConsolidated taxable incomeIntercompany transactionsItems computed on a
consolidated basisNet operating losses (NOLs)
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CONSOLIDATIONS(2 of 2)
Stock basis adjustmentsTax planning considerationsCompliance and procedural
considerationsFinancial statement implications
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Affiliated GroupsStock Ownership Requirement
Parent must directly own 80% of voting power & 80% of total value of stock of at least one subsidiary
Parent & 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
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Affiliated GroupsExcluded 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 trustsS corporations
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Affiliated GroupsComparison with Controlled Group
Definitions (1 of 2)
Brother-sister controlled groups cannot file consolidated returns
Parent-subsidiary controlled groups and parent-subsidiary portion of combined controlled groups can file consolidated returns
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Affiliated GroupsComparison with Controlled Group
Definitions (2 of 2)
Differences between rulesStock ownership for affiliated
group is ≥80% of voting power AND value
Attribution rules more strict for affiliated groups
Excluded corporations differAffiliated group definition tests
done on each day of the year, not just 12/31
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Consolidated Tax ReturnElection (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
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Consolidated Tax ReturnElection (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
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Consolidated Taxable Income
Accounting Periods and Methods
Accounting periodsConsolidated return must conform
to parent’s tax yearAccounting methods
Each group member’s method used for separate filing is used for consolidated return
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Consolidated Taxable Income
Calculation (1 of 2)
1. Compute each member’s income
2. Adjust each member’s income Adjustments made to take into
account special consolidated treatment
3. Remove any item that is reported on a consolidated basis
Resulting amount is separate taxable income
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Consolidated Taxable Income Calculation (2 of 2)
4. Combine separate taxable income (STI) of each member
Resulting amount is combined TI
5. Adjust 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
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Intercompany Transactions
(1 of 3)
Transactions between corporations that are members of the same affiliated group immediately after the transaction
Matching ruleConsolidated group treats
intercompany item as if both companies were divisions of a single company©2011 Pearson Education, Inc. Publishing as
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Intercompany Transactions
(2 of 3)
Acceleration ruleWhen a member leaves the group,
any transaction involving the departing member is fully taken into account
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Intercompany Transactions
(3 of 3)
Examples include:Property transactionsPerformance of servicesLicensing of technologyRenting of propertyLending of moneySubsidiary’s distribution to parent
Dividend or redemption©2011 Pearson Education, Inc. Publishing as
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Property Transactions(1 of 2)
Group members recognize gain or loss on intercompany property transfers in computing separate taxable income
Intercompany gain or loss excluded from consolidated income until a later event triggers recognition
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Property Transactions(2 of 2)
Examples of recognition events:Buyer claims depreciation,
amortization or depletion on purchased asset
Amortization of capitalized services
Departure from the group by either buyer or seller
Parent starts a separate return year
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Other IntercompanyTransactions
Both parties report their side of the transaction in determining separate taxable income
Net effect upon consolidation is zero
If parties use different methods or tax years, adjustments to match income and expense are required©2011 Pearson Education, Inc. Publishing as
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Items Computed on a Consolidated Basis (1 of 2)
Charitable contribution deduction
Net §1231 gain or lossCapital gains and lossesDividends received deductionU.S. production activities
deduction©2011 Pearson Education, Inc. Publishing as
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Items Computed on a Consolidated Basis (2 of 2)
Regular tax liabilityAMT liabilityTax creditsEstimated tax payments
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Charitable Contribution Deduction
The affiliated group’s charitable contribution deduction is computed on a consolidated basisSum 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
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Capital Gains and LossesDetermined in manner similar as
for single corporationDeparting members’ capital
lossesRules similar to NOL treatmentDeparting member allocated a
portion of capital loss carryoverSRLY limitation for carrybacks from
separate return year©2011 Pearson Education, Inc. Publishing as Prentice Hall
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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
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U.S. Production Activities Deduction (1 of 3)
The affiliated group’s U.S. production activities deduction (CPAD) is computed on a consolidated basisLesser of
Consolidated productive activities income OR
Consolidated taxable income before CPAD deduction
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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
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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
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Regular Tax Liability
Multiply consolidated taxable income by the appropriate tax rate(s) in §11If affiliated group chooses files
separate tax returns, reduced tax rates on lower income apply only one time regardless of number of members in group
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Corporate AMT Liability AMT prepared on a consolidated
basis for all group membersComputation parallels
determination of group’s consolidated taxable income
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Tax Credits
Affiliated groups may claim all tax credits available to corporationsDetermined on a consolidated
basis
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Estimated Payments1st two years option to make on
separate or consolidated basisAfter 2nd year must be on
consolidated basis
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Consolidated NOLsCurrent year NOLsCarryovers of consolidated
NOLsCarryback to separate return
yearCarryforward to separate return
yearSpecial loss limitations©2011 Pearson Education, Inc. Publishing as
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Current Year NOLs(1 of 2)
All members’ income/losses combined
Loss from one member offsets income from another member
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Current Year NOLs(1 of 2)
Carrybacks and carryforwards done on consolidated basis if group has not changed its membersCarryback 2 yrs and forward 20
yearsTaxpayer can elect to carryback
NOL from 2008 or 2009 3, 4, or 5 years ©2011 Pearson Education, Inc. Publishing as
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NOL Carrybacks and Carryovers
NOL Allocated to Members with Separate Loss
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Separate NOL of
member___________Sum of all separate
NOLs
Consolidated NOLX =
Portion of consolidate
d NOL attributable to member
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NOL Carrybacks and Carryovers
NOL Carryforwards
If corporation leaves the affiliated group, the departing corp takes its share of consolidated NOL with it
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Special Loss LimitationsSRLY (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
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Special Loss LimitationsSRLY (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, orAmount of the NOL carryover©2011 Pearson Education, Inc. Publishing as
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Special Loss LimitationsSRLY (3 of 3)
SRLY carryover cannot be used when member’s cumulative contribution < $0
SRLY 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
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Special Loss Limitations §382 (1 of 2)
§382 limitation applied when unrelated corp (or group) added as a subsidiary and has NOLs
Limitation determines dollar amount of loss carryforward from new sub (or sub group) that can be applied to reduce consolidated taxable income
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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 assetMay be subject to a valuation
allowance
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Stock Basis Adjustments(1 of 2)
Annually, basis for investment in a subsidiary corporation is adjusted
Adjustment parallels the “equity” method of accounting for investments but uses tax numbers instead of book income numbers
Adjustments listed on page 35©2011 Pearson Education, Inc. Publishing as Prentice Hall
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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 account
Subsequent positive adjustments reduce (or eliminate) the excess loss account©2011 Pearson Education, Inc. Publishing as
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Tax Planning Considerations
Advantages of Consolidating (1 of 2)
Losses in one member offset gains in another in the current year
Intragroup dividends are eliminated
Combined credits and deductions may avoid carryovers
Intragroup gains are deferredConsolidated AMT may reduce
the negative effects of AMT adjustments
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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
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Tax Planning Considerations
Disadvantages of Consolidating
Election binding on subsequent years
Members must use same tax year
Intragroup losses are deferredIntragroup losses may reduces
the limitation on certain deductions and credits
Additional administrative cost©2011 Pearson Education, Inc. Publishing as
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Compliance and Procedural
Considerations (1 of 2)
Basic election and returnFile Form 1120
Including Form 851 affiliations schedule
Subs’ consent to election use Form 1122
Must provide a columnar schedule reconciling consolidated income with members’ separate incomes
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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 basis
Tax treatment of affiliated groups for state income tax purposes of varies from state to state
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Financial Statement Implications
Intercompany Transactions (1 of 2)
Discussion based on 100%-owned sub
Intercompany dividendsEliminated for both tax and book
whether filing separately or consolidated
Intercompany salesDefers intercompany income for
book and tax if filing consolidated returnDeferred amounts may differ
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Financial Statement Implications
Intercompany Transactions (2 of 2)
Intercompany sales (continued)If filing separate returns
Seller recognizes income for tax purposes, but not for financial stmt purposes
Group recognizes deferred tax asset on difference between profit deferred in consolidated financial stmts and taxes paid on seller’s separate tax return
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Financial Statement Implications
SRLY Losses
NOL from SRLY creates deferred tax assetPossibly subject to a valuation
allowance
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