An Affiliated Group is defined for the purposes of consolidated tax returns under the U.S. Internal Revenue Code. This group is composed of companies where the common parent corporation or another inclusive corporation owns at least 80% of the voting power and value of the stock of the includable corporations, excluding preferred stock.
Definition and Criteria
Ownership Structure
To qualify as an affiliated group:
- A common parent corporation must own at least 80% of the voting power and 80% of the value of the stock (excluding preferred stock) of the includable corporations.
- Includable corporations are those that are eligible to be part of the consolidated tax return.
Includable Corporations
Includable corporations cannot be:
- Corporations with income excluded from gross income under Internal Revenue Code.
- Corporations that are foreign entities.
Types of Corporate Ownership
Direct Ownership
Direct ownership implies that the parent corporation directly holds the required percentage of voting power and stock value in the subsidiary.
Indirect Ownership
Indirect ownership can include:
- Intermediate holding companies where the chain of ownership meets the 80% criteria across multiple entities.
Special Considerations
Consolidated Tax Returns
Consolidated tax returns allow an affiliated group to report a combined income, which can minimize overall tax liability by offsetting profits from one corporation with losses from another.
Regulation Nuances
IRS regulations under Section 1504 of the Internal Revenue Code provide guidelines for determining membership in an affiliated group, including complex rules for situations where ownership is less straightforward.
Examples
Example 1: Direct Parent-Subsidiary Relationship
Parent Corporation A owns 85% of Corporation B, fulfilling the requirement for direct ownership.
Example 2: Multiple Layers of Ownership
- Parent Corporation P owns 100% of Corporation Q.
- Corporation Q owns 80% of Corporation R.
- Even though Corporation P does not directly own 80% of Corporation R, the chain of ownership allows R to be part of the affiliated group led by P.
Historical Context
The concept of an affiliated group arose to address complexities in corporate taxation and to provide a more accurate reflection of corporate financial health without double-counting income and deductions across related entities. The laws governing affiliated groups have evolved to close loopholes and to better align with contemporary business practices.
Applicability
Business Use
Corporations often utilize affiliated groups to:
- Optimize tax liabilities.
- Streamline reporting processes.
- Consolidate business management strategies.
Regulatory Compliance
Affiliated groups must adhere to the specific requirements outlined in the Internal Revenue Code to ensure legality and accuracy in their tax filings.
Comparisons
Affiliated Group vs. Controlled Group
- Affiliated Group: Focuses on common ownership for consolidated tax returns.
- Controlled Group: Refers to linked companies for purposes of determining employer obligations under ERISA (Employee Retirement Income Security Act) and other regulations.
Affiliated Group vs. Corporate Conglomerate
- Affiliated Group: Necessitated by tax regulations.
- Corporate Conglomerate: Broad term referring to a corporate group composed of multiple, diverse businesses usually under a single corporate entity.
Related Terms
- Consolidated Tax Return: A tax return filed by an affiliated group that combines all member corporations’ financials into a single report.
- Parent Corporation: The primary corporation that holds the required ownership stakes in affiliated subsidiaries.
- Subsidiary Corporation: A company controlled by a parent corporation, either directly or through multiple layers of ownership.
FAQs
What is the benefit of filing a consolidated tax return?
Are foreign corporations included in an affiliated group?
How is the 80% ownership calculated?
References
- U.S. Internal Revenue Code, 26 U.S.C. § 1504
- IRS Guidelines on Consolidated Returns
Summary
An affiliated group for consolidated tax returns in the United States ensures tax efficiency by allowing corporations within the group to file a single tax return. The group is characterized by a common parent or inclusive corporation owning at least 80% of the voting power and stock value of the includable corporations, except for preferred stock. Understanding the structure, benefits, and legal requirements is crucial for businesses aiming to optimize their operational and financial reporting.
