A consolidated tax return is a corporate income tax return of an affiliated group, who elect to report their combined tax liability on a single return.
How To File A Consolidated Tax Return
Consent by all the corporations within a group to file a consolidated return, which subsidiaries do by filing Form 1122, Authorization and Consent Income Tax Return and attaching it to their group Form 1120. After which the affiliated group is referred to as a consolidated group.
A consolidated group can only exist when the parent corporation satisfies the 80% rule for at least 1 subsidiary. Other members can choose to leave the group without terminating the group’s status. Companies can also join the group later, without having to go through the stress to file form 1122.
Once the parent company satisfies 80% rule, the parent company defines the group. The group still maintain existence if the parent satisfies the 80% rule for another corporation within the group, even when the original subsidiary that defined the group decides to leave the group.
A consolidated tax return gives reports on the income generated or loss incurred of the parent for the entire business year, but only a section of the year for which any affiliated group belonged to the group must be reported on the consolidated return. If perhaps any affiliate had any transaction history apart from the ones known to the group during a portion of the tax that year, then that portion must be reported separately on the company’s own Form 1120.
Consolidated Tax Return
The consolidated tax return Form 1120 is strictly advised to file by the parent of the consolidated group, all the affiliate must adopt the parent’s tax year. Although each entity may decide to adopt its own style of accounting, the information must be in accordance and consolidated to determine taxable income, which requires this 4 steps:
Step 1: All the entity must first determine its taxable income, profits, deductions, and losses.
Step 2: All the affiliate must account for all intracompany transactions, which are all those transactions between 2 or more members of the group.
Step 3: All the affiliate must then determine its net income or loss by excluding those items that have to consolidate. The net income or loss is referred to as a separate taxable income. The items are generally calculated using these consolidated criteria which include: capital gains, dividend received deductions, charitable contribution deductions e.t.c.
Step 4: The separate taxable incomes belonging to all the affiliates are then totaled so that the consolidated items can be netted among the group to arrive at the group’s consolidated taxable income (CTI). The parent reports the CTI on Form 1120, note each item on the form is either the sum of the items of each affiliate or the whole consolidated group item. The parent must also attach the form 851, affiliations schedule whenever there is a need to file a consolidated return.
The consolidation of the tax returns of any affiliated group includes consolidating the group’s regular income tax, foreign tax credit, accumulated tax earnings, and any tax credits.
Most importantly the parent company is liable to serve as the group’s agent as regards filing the consolidated Form 1120 and also paying the federal tax liability. All the company that was affiliated during any part of the year still maintains liability for any federal income tax of the group.
Advantages Of Consolidated Tax Returns
The advantages of filing consolidated returns include:
- The profits of one company can be offset against the loss of another.
- Capital gains and losses can be netted out.
- Taxes are not charged on intracompany transactions.
- Income recognition is deferred on any intracompany transactions.
- All unused foreign tax credit by one company can be used by another in the group.
- all tax matters are addressed through the parent company which serves as an agent.
Disadvantages Of Consolidated Tax Returns
- All accumulated loss and profits of the whole group are considered when calculating the accumulated tax liability, considering the fact that a single minimum credit account can be used.
- Where matching rules apply all the intracompany transactions must be tracked over a period of years.
- With the recognition of income resulting from deferred intracompany transactions, so are many losses.
Among the many changes made by the Tax Cuts and Jobs Act (TCJA) that was signed into law on December 22, 2017, is the elimination of the alimony deduction from the tax code through at least 2025 when the terms of the TCJA might potentially expire. Alimony was used to be a taxable income to the receiver which is the ex-spouse and for the payer, it was tax deductible.
It’s unfortunate that alimony payments are no longer deductible and the recipient no longer has to report it as income. However, the provision will not begin technically until 2019. You can still report any alimony you received and claim a deduction through Dec. 31, 2018.
Tax Planning and Divorce 2018 Tax Law
Under the terms of the TCJA, the date of your divorce decree or agreement is pivotal. If you were divorced at any time in 2018 or earlier, you’ll have to deal with the old rules that apply for divorce but if your divorce is finalized on Jan. 2, 2019, the new rules will apply.
Any decree or divorce agreement entered before Jan. 2, 2019 can still specifically be modified to adopt the terms of the TCJA but both ex-spouses will be required to provide a mutual consent.
You may have to pay alimony and will want to negotiate your divorce accordingly if your proceedings will be finalized in 2018. For alimony paid in 2019, no tax deduction will be taken.
How to report the alimony you’ve received?
The rules for reporting the income still hasn’t changed from previous years assuming your divorce is finalized prior to the end of 2018. They still apply when you get your 2018 return ready in 2019.
Using Form 1040, you are required to enter the full amount of any alimony you received. If you’re separated legally but not yet technically divorced, you receive an alimony income which is also known as “separate maintenance” for tax purposes. The payments received under the terms of a temporary support order that might be in place is not included while your divorce is pending.
Any amounts you receive for child support does not have to be reported since child support is considered a non-taxable event. It will be shown on your federal tax return and the parent making the payments is not allowed to claim it as a tax deduction.
What is the exception to the rule?
If your ex-spouse doesn’t claim a tax deduction for the payments he made, there’s no need for you to report alimony received as income. The only thing the IRS cares about is that someone pays taxes on this money. You will have to do it if your ex-spouse isn’t doing so. You cannot claim it as income yourself if your ex does include it in his taxable income.
Otherwise, your overall taxable income includes your alimony payments at least through 2018. The IRS will tell you to accept it tax-free after that and your ex will have to deal with the taxes as he is the one who earned it in the first place.
How to report alimony you’ve paid?
You have to report the total amount of paid alimony or separate maintenance to your ex-spouse on Form 1040 as well as your ex-spouse’s Social Security number. The IRS will be able to determine if it was declared as income through doing it and will let them know who received the money.
If you can’t find it on previous year’s jointly-filed returns or other documents because he or she won’t give you the number, don’t worry. Your ex will be charged by the IRS a penalty of $50 for not supply the number to you.
The alimony you claimed will be considered as an “above the line” deduction. Claiming it doesn’t require you to itemize your deductions. You have two choices: claim both the alimony deduction and the standard deduction or claim it and itemize other deductions.
What are the requirements to deduct alimony payments?
There is a list of requirements and rules you need to follow in order to deduct alimony you’ve paid. They are the following:
- You are not allowed to file a joint tax return with your spouse so if you’re planning to do it, you’re wasting your time. This is because your divorce isn’t final yet.
- Pay alimony in cash including checks or money orders. You cannot deduct property or asset in lieu of alimony since this is a property settlement according to the IRS.
- The payment must be given to your or on behalf of your spouse or former spouse such as if your divorce or separate maintenance decree entails that you must make her mortgage payments for her as a form of alimony.
- Your divorce decree, separate maintenance decree, or written separation agreement must only state that the payment is an alimony nothing else.
When you’re making payments, you and your ex cannot live in the same home.
- It’s ideal that your divorce decree or separate maintenance agreement should clearly state that you have no liability to keep on making payments after your former spouse dies.
The act of itemizing deductions is said to be an effective way of reducing one’s taxable income and maximizing tax savings. You get to claim a bigger deduction compared to the standard deduction. Not that fast, you will need to fill a Schedule A attachment to your earnings and also keep records of all your expenditures.
Here are things you need to know with respect to the new Tax bill-the Tax Cuts and Jobs Act if you have chosen to itemize than choose standard deduction:
- The Medical Expenses Deductions: The changes made are favorable to taxpayers. You are opportune to claim a deduction for the part of your expenses that is more than 7.5%(previously 10%, though expected to return to 10% this year) of your gross income adjusted through the previous tax year. You have the chance to deduct more in medical expenses. Other things remain unchanged. You can lay claim on personal expenses, expenses on a spouse, or expenses on your dependents, and you are expected to have paid those expenses in the same year you are requiring a deduction. Cosmetic-related surgeries and their treatments are not deductible with the exception of those on prevention or those for treating existing issues.
- The State and Local Taxes Deduction (SALT): There is now an overall limit to the amount you can deduct. The limit is $10,000 under the Tax Cut and Job Act. For instance, if you make a payment of $6000 property taxes and an income tax of $5,000, what you will lose is $1000 of the total $11,000 from 2018. It is either you claim $5,000 property taxes or $4000 income taxes, the $1000 paid on the $11,000 is not available again. This will be a difficult one for those who reside in states where the tax rates on income are high such as California, New Jersey, New York and the District of Columbia. For those who are married, you will need to divide $10,000 into two. You are only entitled to the reduction in local taxes, property taxes, and state taxes. You cannot deduct foreign real property taxes. This has been eliminated by the new provision.
- Repayment of Taxes to Enjoy Old Deductions:
According to the IRS, if you prepay 2018 property taxes in the month of December, they are deductible in the year 2017 given that they were assessed already. What this means is that you have received a bill for taxes in 2018 and have paid them before December 31, 2017.
There is nothing claiming a 2017 deduction for an anticipated 2018 taxes.
- Home Mortgages Interest Deduction:
Though, not yet eliminated, but has more restrictions now though most of the taxpayers may not feel the heat except those who can pay for sizeable mortgages. Throughout 2017, deductions on mortgage interest loans of about $1million were possible given that the money was used to acquire your first or the second residence, or half a million dollars if you are married and you have filed a separate return.
- Deductions That Affect Employees: Two beneficial deductions for the working population were eliminated by the New Tax Cut and Job Act. Previously, specific moving expenses can be deducted given the reason for relocation relating to your work. This was subjected to scrutiny anyway. Those itemized deductions claimable for expenses incurred on purposes relating to your work are now gone under the new development. Anyway, these were deductible given the fact that they are over 2% of your Annual General Income if the reimbursement was not done by your boss.
- Deduction on Theft and Casualty:
This one survived and it is claimable only if the loss is suffered as a result of a disaster declared federally. The event must be cited by the United States President as a National Disaster. This clause covers hurricanes, tsunami and not the theft of your brand new laptop.
It is always advisable to have a tax plan in 2019. Your tax accountant or tax preparer can help you determine how much you earn an income and your expenditures. They will also help you devise tax filing strategies and advise you better on whether to use Itemized deduction or Standard Deduction depending on your status.
The Global Economy is slowing down, but the US economy is holding. the lower unemployment rate of 4%. As I previously said, before, that China (and most of Asia) are slowing down plus European economy. (Here)
- Deep dive in the Numbers
Friday morning, before the opening bell, the U.S. Labor Department reported that the economy added 304,000 jobs during the month of January, crushing expectations for a 165,000 gain. However, working to offset the huge beat, December’s reading was revised down to indicate a gain of 222,000 jobs (down from 312,000 reported previously, though November’s reading was revised up to 196,000 (from a gain of 176,000 previously reported). With these revisions, job gains have now averaged 241,000 over the last three months.
Despite the huge jobs number, the unemployment rate increased 0.1 percentage points to 4.0%, and while this may appear counterintuitive given the strong headline reading, it can be explained by looking at the participation rate — which accounts for the number of Americans looking for work or currently working — which also increased by 0.1 percentage points to 63.2%, indicating that more workers are returning to the labor force. A different, broader measure of unemployment and underemployment, known as the U-6 — which accounts for those working part-time because they are unable to find full-time work – increased to 8.1%, from 7.6% in December.
Deep Dive in the Numbers
In January, average hourly earnings for all employees on nonfarm payrolls increased by $0.3 to $27.56, following a $0.10 gain in December. Over the year, average hourly earnings (i.e., wage inflation) have increased $0.85, or 3.2%, in line with the annual rate of advance seen in December. As we noted in last month’s analysis, we believe a 3.2% annual advance to represent that wage inflation is under control. Remember, this reading is important to the Fed as the central bank uses it as an indicator for future expectations of inflation, and too hot of a number gives the Fed justification to raise interest rates to combat inflation.
Jobs gains were broad across many sectors. By sector, leisure and hospitality added 74,000 jobs in December; followed by an increased of 52,000 jobs in the construction sector; 42,000 in healthcare; 30,000 in professional and business services; 27,000 in transportation and warehousing; 21,000 in retail trade; 13,000 in manufacturing 7,000 in mining; and 1,000 in the federal government. There was little change, however, seen in wholesale trade, information and financial activities.