Consolidated Tax Returns and GoSystems Tax Software
Consolidated Tax Returns
The consolidated tax return, in simple terms, is "a method by which to determine the tax liability of a group of affiliated corporations" (Pratt and Kulsrud 8-2). It is based on the assumption that the business operations of affiliated companies represent a single entity and that, hence, the group's aggregate income ought to be taxed, as opposed to the separate incomes of the member corporations. It would be prudent to mention, however, that the return does not simply report the sum of the taxable incomes of all member corporations as one large, conglomerate entity; rather, it follows a set of special Treasury regulations in determining how to make adjustments for intercompany bargains, and establishing which items to state on a consolidated basis (Pratt and Kulsrud 8-2).
The History of Consolidated Tax Returns
The consolidated tax return traces its origin to the early regulations that governed the taxation of excess economic profits during the First World War (Pratt and Kulsrud 8-2). Under these regulations, the Internal Revenue Service (IRS) reserved the authority to limit tax avoidance by shifting the 'excess profits' of one corporation to another corporation. By 1917, the IRS was using this authority to curtail the benefits of affiliated corporations by requiring them to file consolidated tax returns. A year later, Congress codified the authority of the IRS and made it mandatory for affiliated corporations to file consolidated returns for income tax as well as excess profits tax purposes.
The excess profits tax, however, lost its relevance soon after and was repealed (Pratt and Kulsrud 8-2). A provision permitting the IRS to reallocate credits, expenses, or income among affiliated corporations was enacted as a way of ensuring that corporate income was clearly reflected. These two actions, however, slashed the opportunity for income-distortion, and ruled mandatory return-filing almost irrelevant (Pratt and Kulsrud 8-2). As a consequence, filing was made optional, and remained so until the whole system was abolished in 1934 because of its role in aggravating the effects of the Great Depression of the 1930s (Pratt and Kulsrud 8-2). It, however, reappeared just before the beginning of the Second World War - still optional, but with higher filing costs and a penalty on taxable income (Pratt and Kulsrud 8-2). Most corporations opted to file their returns separately so as to reap the gains of multiple corporations. These gains were, however, curtailed severely by the passage of the Tax Reform Act in 1969; and since then, there has been a growing interest in the issue of consolidated tax returns (Pratt and Kulsrud 8-2).
Advantages and Disadvantages of Filing Consolidated Tax Returns
First, consolidated returns make it possible for groups to offset the tax liability and income of members using credits and unused losses of other members of the group in the current financial period (Pratt and Kulsrud 8-5; Warner 2). This way, the conglomerate is able to reap tax benefits immediately, hence avoiding the need to wait for recovery carryovers (Pratt and Kulsrud 8-2). Moreover, excess credit or losses can be carried forward to subsequent periods.
Another key advantage of filing consolidated tax returns is the ability to defer intercompany gains until later periods (Pratt and Kulsrud 8-5; Warner 2). Such deferrals make it possible for the group to enjoy the benefits of postponing the recapture of such items as investment tax credit and depreciation (Pratt and Kulsrud 8-5).
A third advantage of filing consolidated returns is that it exempts from tax and income any intercompany distributions between members, including dividends (Pratt and Kulsrud 8-5). Other benefits include the ability of individual members subject to percentage limitations on credits and deductions to avoid such limitations, which are usually taken care of on an aggregate/consolidated basis; and the fact that the basis of the subsidiary's stock is increased by accumulated income during the filing years, such that if it (the subsidiary) is ever dispossessed by the parent company, it would benefit through either an increase in resultant gains, or a decrease in losses (Pratt and Kulsrud 8-5)
Consolidated tax returns impose an additional financial burden as they require a group to comply with all the relevant consolidated returns regulations (Pratt and Kulsrud 8-5). Secondly, the election to file is binding and can only be terminated under the authorization of the IRS, or through the disbandment of the group (Pratt and Kulsrud 8-5). Another fundamental disadvantage is that the tax credits of the more profitable affiliates could be severely limited by the continued capital losses of a consistently poorly-performing affiliate. Additionally, the law requires subsidiaries to change their tax years to be concurrent with those of their parent company. Such adjustments can give rise to short tax periods that are considered complete tax periods for carryover and carry-back purposes. Finally, thanks to the controversial loss disallowance rules, loses incurred by a conglomerate on the disposition of a subsidiary's stock are often disallowed, causing adverse effects on the group's financial viability (Warner 3).
Filing Consolidated Tax Returns
Pursuant to Code Sec. 1501 of the Internal Revenue Service Act, a group that could be categorized as being affiliated is permitted to file consolidated returns as long as the individual group members are in agreement with the various consolidated returns regulations (Warner 2). The Code defines an 'affiliated group' as includible corporation (one or more) with a common parent corporation, and linked to each other through stock ownership (Warner 2). The parent should own not less than 80% of both the total stock value and the voting power of the includible corporations. According to the code, "any corporation other than certain companies (such as foreign corporations, insurance companies, and real estate investment trusts (REITs))" qualifies as an includible corporation (Warner 2).
Election to File
Every member must back or endorse the consolidated return regulations by filling the 'Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Tax Return' form (Warner 3). The Code requires that consent occur, regardless of the period of time for which the member and the group have been affiliated (Warner 3). The return should be filed "by the due date for the common parent's tax return" (Warner 3).
Discontinuing the Election
As mentioned previously, the election to file is binding, and can only cease to exist if the group is disbanded, or if it (the group) can establish good cause to be allowed to file separate returns by the IRS (Pratt and Kulsrud 8-10). The application for the same must be made to the IRS at least 90 days prior to the tax return's due date (Pratt and Kulsrud 8-10).
Part Two: GoSystem Tax Software
The GoSystem Tax Reporting software is one of the most sophisticated web-based tax compliance services at the disposal of the 21st century accountant. The Thomas Reuters product offers reliable mechanisms for handling 'big tax data', and is fully scalable to respond to the needs of both medium-sized and large enterprises. Since its introduction in 1999, GoSystem has had a number of improvements aimed at making it more useful to a wider range of CPAs, and more effective as a tax preparation software in an era of changing tax regulations. The most recent addition was a new MS Excel mapping tool, doubling as a work paper and direct data import, and designed to standardize all data entry screens, thereby unifying tax preparation work.
The software makes use of remote server technology, which allows users to store, access, and share tax and data applications from any broadband connection. Its web-based nature enables it to incorporate multiple security layers, including data encryption, application security, and virus protection (Find Accounting Software). It has built-in interactive diagnostic, reviewer notes, and online conferencing, all of which are meant to facilitate the e-filing of tax returns. In addition, it offers over 2,500 state and federal schedules/forms (available at CS.ThomsonReuters.com), from which accountants can obtain relevant tax data and tax preparation guidelines relating to their respective jurisdictions (Find Accounting Software). The software's sweet spot lies in its integrated K-1 transfer capabilities -- it is able to obtain and transfer K-1 data from a variety of sources including spreadsheets, Engagement CS balances, and general ledger programs automatically (Find Accounting Software). The Custom Tax Equalization Module boosts the software's integration capability by providing platforms for handling complex expatriate calculations (Find Accounting Software).
Simultaneous Multi-User Access: in addition to enabling users to access multiple tax return types and up-to-date data on tax years from secure online platforms, GoSystem provides frameworks for multiple users, either in the same or in different locations, to work on the same return concurrently without overwriting data (Thomson Reuters). This makes it quick and easy for users to do comparisons and, hence, to check the accuracy of prepared returns. This simultaneous multiple-user access also makes it possible for Thomson's support representatives to check returns, respond immediately to users' queries, and provide technical assistance to users encountering difficulty in the filing or preparation of tax returns…