5 Disadvantages of Filing a Consolidated Tax Return (U.S. Tax)

A group of corporations may elect to file a consolidated tax return and be treated as a single taxpaying entity. Here are 5 disadvantages of filing a consolidated tax return:

#1: the election to be treated as a consolidated entity is binding.
#2: all members of the group must use the parent's tax year (this could result in a subsidiary having a short tax year when it enters the group).
#3: losses from certain intercompany transactions are not recognized until a sale is made to an unrelated third party (thus delaying tax deductions).
#4: the parent's basis in the subsidiary's stock is decreased when the subsidiary incurs losses (a lower basis means the parent will recognize more gain if it sells the subsidiary's stock).
#5: there are administrative costs associated with electing and maintaining the consolidated status.—
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