Members of an affiliated group of corporations can file a consolidated tax return that allows all members to pool their income as one single entity if they meet includible corporation and stock ownership requirements. This privilege allows corporations to take advantage of several tax benefits that otherwise may not be available for corporations that are not members of affiliated groups.
Corporations that a part of an affiliated group must comply with Section 1502 of the Internal Revenue Code, and they must be connected through a common parent corporation that owns stock representing 80 percent of the total amount of voting power and 80 percent of the total value of at least one corporation in the group. All corporations in the group must be connected to the common parent corporation through stock ownership.
Advertisement Article continues below this adAll corporations are required to file separate tax returns unless the corporations are members of an affiliate group that files a consolidated tax return. The tax liability for one corporation may be higher than the combined tax liability of a consolidated corporation. By having the election to file a consolidated tax return as a group, it helps deter corporations from shifting income to other corporations to minimize tax liability.
The income and operating losses of all members can be joined together as the annual taxable income of a single corporation. However, each corporation in the group must calculate taxable income separately before contributing to the combined income of the group. The losses of one corporation can be offset against the income of another corporation. The net operating losses of each corporation may contribute to the losses of the combined group. The capital gains earned by one corporation in the group can also be used to make up for the losses of another member.
Advertisement Article continues below this adCorporations seeking to minimize their tax liability may consider joining an affiliate group of corporations for the purpose of filing a consolidated tax return. The tax liability of the affiliated group is based upon the aggregate income of the entire group, and each member of the group is liable for the total tax liability for the entire group. However, tax credits and deductions for the group can produce lower tax liabilities.