Question

Advantages of filing a consolidated tax return are: (Check all that apply.)

1) The losses of one group company can be offset against the income of another.
2) Losses from intercompany transactions can be deferred until sold to an outside party.
3) In certain years, a consolidated return can be filed and in other years separate returns may be filed.
4) Income from intercompany transactions can be deferred until sold to an outside party.

Answer 1

Filing a consolidated tax return allows group companies to offset losses against profits of other entities within the same group, and defer taxes from intercompany transactions until external sales occur. However, the decision to file consolidated is binding for subsequent years unless ownership or structure changes significantly.

Step-by-step explanation:

The advantages of filing a consolidated tax return include: 1) The losses of one group company can be offset against the income of another, which can lower the overall tax burden of the corporate group. 2) Losses from intercompany transactions can be deferred until those goods or services are sold to an outside party, which aids in the management of the tax liability within the corporate group. 4) Similarly, income from intercompany transactions can be deferred until these are sold to an external party, allowing for tax planning opportunities. However, it should be noted that once a group elects to file a consolidated return, it must continue to do so in subsequent years unless there is a significant change in ownership or business structure.