Consolidated tax returns allow an affiliated group of corporations to file a single federal income tax return. This can offer significant tax advantages, but it also comes with complex rules and requirements. Understanding these nuances is crucial for the REG section of the CPA exam.

A consolidated tax return is an election made by an 'affiliated group' of corporations to file one tax return for the entire group, rather than each corporation filing its own separate return. This election is generally binding for future years unless consent to revoke is obtained from the IRS.

To qualify as an affiliated group, a common parent corporation must directly own stock possessing at least 80% of the total voting power and at least 80% of the total value of the stock of at least one other includible corporation. Additionally, for each corporation in the group (other than the common parent), stock possessing at least 80% of the voting power and at least 80% of the value of its stock must be owned directly by one or more of the other includible corporations in the group.

Consolidation offers several advantages:

• Offsetting Losses: Losses from one member of the group can offset profits from another member, reducing the overall tax liability.
• Deferral of Intercompany Transactions: Certain transactions between group members (e.g., sales of inventory) can be deferred until the property leaves the group.
• Elimination of Double Taxation: Dividends paid between members of an affiliated group are generally eliminated from taxable income.

Navigating consolidated returns can be challenging. Key areas to watch out for include:

• Consolidated Net Operating Losses (CNOLs): Rules for carrying CNOLs forward or backward can be intricate.
• Investment Adjustments: Proper tracking of stock basis adjustments is crucial.
• Intercompany Eliminations: Ensuring all intercompany profits and losses are correctly eliminated or deferred.
• Separate Return Limitation Year (SRLY) rules: These rules can limit the use of losses and credits from separate return periods.

For the CPA REG exam, expect questions that test your understanding of:

• Eligibility requirements for filing consolidated returns.
• The tax treatment of intercompany transactions.
• Stock basis adjustments for subsidiaries.
• The impact of consolidated returns on net operating losses and credits.
• The consequences of terminating the consolidated group.

Mastering consolidated tax returns requires diligent study and practice. Work through numerous CPA exam-style questions to solidify your understanding of these complex rules.