Affiliated Group

Affiliated Group Consolidated Tax Returns Corporate Taxes Ownership Voting Power Stock Business Law Taxation
For purposes of consolidated tax returns, an affiliated group is composed of companies whose common parent or other inclusive corporation owns at least 80% of the voting power and value of the stock of the includable corporations (except preferred stock).
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Definition

An affiliated group refers to a collection of parent and subsidiary corporations that are eligible to file a consolidated federal income tax return. To qualify as an affiliated group under U.S. tax law, one corporation (typically the parent) must own at least 80% of the voting power and value of all stock (excluding preferred stock) of the other corporations in the group.

Key Characteristics

  • Ownership Threshold: The parent company must own at least 80% of the voting power and value of the stock of the subsidiary companies.
  • Voting Power: The term specifically refers to shares that have the power to vote in corporate matters.
  • Includable Corporations: Certain types of corporations, such as S corporations, foreign corporations, and tax-exempt organizations, are generally not includable in an affiliated group.

Examples

  1. Large Conglomerate: A multinational conglomerate might own several subsidiary companies. If one of these subsidiaries owns other subsidiaries, and the ownership meets the 80% threshold, they can file a consolidated tax return as an affiliated group.

  2. Parent-Subsidiary Structure: A parent company owns 85% of Company A and 90% of Company B. Both Company A and Company B can form part of an affiliated group for the purpose of filing a consolidated tax return.

Frequently Asked Questions

1. What are the tax benefits of being an affiliated group?

  • Filing a consolidated tax return can allow for the offsetting of profits and losses among subsidiary companies, which may reduce the overall taxable income of the group.

2. Can foreign corporations be part of an affiliated group?

  • Generally, foreign corporations cannot be included in an affiliated group for U.S. federal tax purposes.

3. Does the 80% ownership include indirect ownership?

  • Yes, indirect ownership through other subsidiaries can count towards the 80% threshold.

4. Are there any special forms required for filing as an affiliated group?

  • Yes, affiliated groups must file IRS Form 1120 along with Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More).

  • Consolidated Tax Return: A single income tax return filed by an affiliated group that combines the tax liabilities of all included corporations.

  • Parent Company: A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.

  • Subsidiary: A company controlled by another company, the parent, through ownership of the majority of its voting stock.

Online References

  1. IRS - Consolidated Returns
  2. Investopedia - Affiliated Group

Suggested Books for Further Studies

  1. “Corporate Income Tax Accounting” by Philip Bashe
  2. “Federal Income Tax: Code and Regulations—Selected Sections” by Martin B. Dickinson
  3. “Federal Income Taxation of Corporations and Shareholders” by Boris I. Bittker and James S. Eustice

Fundamentals of Affiliated Groups: Taxation Basics Quiz

### What is the minimum ownership percentage required for a company to be part of an affiliated group? - [x] 80% - [ ] 50% - [ ] 75% - [ ] 85% > **Explanation:** The parent company must own at least 80% of the voting power and value of the stock (excluding preferred stock) of the includable corporations to form an affiliated group. ### Can an S corporation be part of an affiliated group for federal tax purposes? - [ ] Yes - [x] No - [ ] Only under certain conditions - [ ] If the ownership exceeds 90% > **Explanation:** Generally, S corporations are not eligible to be part of an affiliated group for filing a consolidated tax return. ### Which IRS form do affiliated groups use to file their consolidated tax returns? - [ ] Form 940 - [x] Form 1120 - [ ] Form 1065 - [ ] Form 8300 > **Explanation:** Affiliated groups must file IRS Form 1120 along with their consolidated tax returns. ### What type of ownership does the 80% threshold refer to? - [ ] Indirect Ownership Only - [x] Voting Power and Value of Stock - [ ] Capital Stock Only - [ ] Preferred Stock Only > **Explanation:** The 80% threshold refers to the voting power and value of the common stock, explicitly excluding preferred stock. ### Can foreign corporations be included in an affiliated group for U.S. federal tax purposes? - [x] No - [ ] Yes, but only under special agreements - [ ] Yes, if they have U.S. operations - [ ] Yes, if ownership exceeds 90% > **Explanation:** Generally, foreign corporations cannot be included in an affiliated group for U.S. federal tax purposes. ### What is one main advantage of filing a consolidated tax return as an affiliated group? - [ ] Simplified Compliance - [ ] Direct Tax Credits - [ ] Lower Interest Rates - [x] Offset Profits and Losses > **Explanation:** Filing a consolidated tax return allows the affiliated group to offset profits and losses among its subsidiaries, potentially reducing the overall tax burden. ### Indirect ownership through other subsidiaries can count towards the 80% threshold. - [x] True - [ ] False > **Explanation:** Indirect ownership is counted when determining if the 80% ownership threshold is met. ### Which type of stock is excluded when considering the 80% ownership for an affiliated group? - [ ] Common Stock - [ ] Stock Options - [ ] Convertible Notes - [x] Preferred Stock > **Explanation:** The 80% ownership requirement specifically excludes preferred stock. ### Are tax-exempt organizations generally includable in an affiliated group? - [ ] Yes - [x] No > **Explanation:** Generally, tax-exempt organizations are not includable in an affiliated group for the purposes of filing a consolidated tax return. ### What must a corporation own to meet the 80% ownership threshold? - [x] At least 80% of the voting power and stock value - [ ] At least 50% of the company's revenue - [ ] At least 90% of the company's assets - [ ] At least 70% of the company's employees > **Explanation:** To be part of an affiliated group, a corporation must own at least 80% of the voting power and stock value of its subsidiary corporations.

Thank you for exploring the intricacies of affiliated groups with our comprehensive article and challenging quizzes. Keep excelling in your tax law knowledge!

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