What is a Consolidated Tax Return?

A consolidated tax return is a single filing that covers several subsidiary companies and their parent company.

One of the advantages of doing so is that the capital gains of one can be offset by the capital losses of another. It can also allow a profit sharing plan for the parent corporation to use profits from the subsidiaries. Corporations with subsidiaries can file a consolidated tax return that covers all of the affiliated companies.

It allows transactions between the affiliated companies to be considered internal transfers which are not taxable events in general. This can be an advantage in many ways, but it can also limit the amount of deductions that can be taken for several kinds of deductions that have limits-- if the companies filed separately they could possibly each take that deduction up to the limit.

The filing procedure for a consolidated return is also one of the most complex. Some states may not allow consolidated filings for state taxes, and the states that do may use a different set of rules than the federal rules.

If a company files consolidated returns for many states, it can be an expensive and intricate process. Once a company decides to use consolidated federal tax returns, it cannot switch to non-consolidated unless the IRS grants permission, which is only given in certain circumstances.