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Consolidated tax returns allow affiliated corporations to file one return for the annual period, simplifying the tax filing process and sometimes allowing for tax breaks. The format was developed in the early 20th century to prevent profit shifting and became mandatory in 1918. It was repealed after World War I but reinstated in 1942 due to the Great Depression. The role of the consolidated tax return has been constant since the 1940s.
Consolidated tax returns are a means of allowing corporations that are part of an affiliated group to file one return for the annual period, rather than each entity filing separately. The ability to file files together depends on the exact nature of the connection between the parent organization and the subsidiaries that make up the group. Along with simplifying the tax filing process, consolidation sometimes makes it possible for conglomerates and other affiliated groups to take advantage of certain tax breaks that would not be possible with individual filings.
The history of the consolidated tax return in the United States dates back to the early 20th century. During this period, the government sought ways to constrain corporations from paying taxes by shifting what were thought to be excessive profits from a highly profitable subsidiary to another member of the corporate family operating at little or even a profit. loss. By 1917, the Commissioner of the Internal Revenue Service had developed the consolidated format as a means of avoiding this profit shift.
The end result is that families of corporations that included multiple corporations could file a single entity and be taxed on the overall profit generated by the parent and all subsidiaries. This arrangement was understood to be equitable for purposes of determining overall tax liability without creating an unrealistic burden on any business entity. By 1918, Congress made this type of return mandatory to ensure compliance with laws regarding income tax, as well as taxes on excess profits.
After the end of World War I, taxes on excess earnings were repealed and the primary purpose of the consolidated tax return ceased to exist. Congress repealed laws mandating its use, but the Great Depression led to a resurgence of interest in this form of tax filing, as the practice of routing profits through unprofitable subsidiaries became commonplace again. In 1942, Congress again made it possible for companies to file consolidated returns, which helped minimize pipeline activity.
The role of the consolidated tax return has been more or less constant since the 1940s. For a time, a 2% penalty on consolidated taxable income was imposed, but that penalty was repealed in 1964. Currently, corporate structures that include a parent company and subsidiaries may use this form or file as individual entities.
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