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Qualifying as Disregarded Entities

The easiest way for subsidiaries to move money to the parent company is by qualifying as
disregarded entities. Tax laws allow certain types of wholly-owned companies to forego filing a
separate tax return. Instead, you would have your parent company report the subsidiary’s
operations on its own return. Limited liability companies (LLCs) with one owner automatically
qualify for this treatment.

Subsidiary corporations can file Form 8832 to make the election to become a disregarded entity.
Because the subsidiary isn’t treated as a separate taxable entity, it can pay revenue to its parent
simply by transferring the funds.

Consolidated Groups of Companies

Your company may not have 100 percent ownership of each of its subsidiaries. For example, you
could have acquired majority control of a company to enter a new market or to expand your
share of a certain market. If you meet the ownership requirements and the minority owners of
the subsidiary companies agree, you can elect to file a consolidated return.

Your parent company must own at least 80 percent of the stock of a given subsidiary by voting
power and total value. The subsidiaries must file IRS Form 1122 agreeing to the election, and the
parent company files IRS Form 851 providing information on the affiliated companies with every
consolidated return. Like disregarded entities, affiliated companies filing on the same
consolidated return can transfer money among themselves any way they like.

Separate Tax Entities

Even if your group of companies qualifies for consolidated status, you might want to avoid the
tax complications that go along with making the election. As separate tax entities, subsidiaries
are responsible for filing their own returns and reporting dividend distributions. The parent
company has to report dividends from subsidiary companies as taxable income. The dividends-
received deduction mitigates the multiple layers of taxation, as subsidiaries pay their earnings to
the parent company and the parent company pays its earnings to the owners.
Financial Reporting Purposes

If you choose to move revenue to different subsidiaries and back up to the parent company,
you'll subject your earnings to a variety of tax treatments. Generally accepted accounting
principles, or GAAP, dictates how companies present their financial data, and it has different
rules for handling transfers between parents and subsidiaries.

Accountants at the parent company collect and combine all the information from the
subsidiaries, and no formal transfer of revenue needs to occur. The subsidiary companies don’t
need to issue their own financial statements, so their revenue and expense data gets gathered
internally to produce a set of consolidated financial statements for the company as a whole.

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