Hence, the taxable income of the group is unchanged.
So even if a corporate group must file a consolidated financial accounting report does not necessarily qualify it for filing a consolidated tax return.
When a consolidated return for a group is 1 filed, consent by all of the corporations within the group is required, which subsidiaries do by filing Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return and attaching it to their group's Form 1120.
There are several advantages to filing a consolidated tax return, such as being able to centralize the planning, reporting, and paying of the tax, but once the choice is made to file consolidated returns, then the group must continue to do so thereafter.
Although a group that has chosen the consolidated filing option can ask the IRS to discontinue the consolidated filing, the IRS rarely grants such permission, although at times it may grant blanket permission to numerous taxpayers within a certain industry where changes in the tax code may adversely affect their consolidated returns. However, if the business entities file a consolidated Form 1120, then the controlled corporate group tax rules do not apply.
IRC §1501 allows, but does not require, an affiliated group of corporations to file a consolidated income tax return for the group.
Consolidated corporate returns have been allowed since 1918, in recognition of the fact that although many businesses achieve some of their objectives with multiple legal entities, the tax code recognizes that the business entity is singular.There are many tax rules to prevent the use of intercompany transactions to reduce or avoid tax, but the net effect of these rules is that if CTI changes because of the intercompany transaction, then there must be an accounting adjustment to eliminate the change; otherwise, no accounting adjustment will be necessary if the transaction, as a transaction between 2 separate entities, would have no different effect than if it had occurred within the divisions of a single corporation.So if Affiliate A provides ,000 worth of services for Affiliate B, then Affiliate A records the income while Affiliate B records the ,000 payment as a deduction.The use of consolidated returns also necessitates that each company adjust its basis of held stock of the other affiliates, so that gains or losses are not recognized more than once.In a consolidated filing, losses can exceed the basis of the subsidiary's stock owned by the other affiliates, whereby the negative stock basis adjustment creates an excess loss account in regard to the stock.Since 1997, tax law has allowed a new type of business entity, referred to as a Qualified Subchapter S Subsidiary (), which is basically an S corporation in every way except that it is wholly owned by an S corporation parent.