When several companies are grouped into a large group, the parent company acts directly with the IRS, pays the group`s tax debts and receives repayments. Tax allocation agreements are often used by members of a consolidated group to determine how these funds will be allocated and distributed. The authors describe the issues that companies must consider when developing such agreements, including how the loss of return and loss of net operating was influenced by the Tax Reduction and Employment Act of 2017. Alternatively, a tax allocation agreement could assign a refund based on the member who generates the taxable income that allows the group to use the advance. Under this method, the group would be treated in such a way as to record the total loss of subsidiary 1 in year 3, the subsidiary having generated 1,100% of the revenues that allowed it to use the notes. Since Subsidiary 1`s share of the loss is fully absorbed, the group would then turn to its subsidiary 2 and use $600 $US of its $2,000 stake in CNOL. A third alternative, which may be necessary if Subsidiary 1 is a regulated business, would require the parent company to pay the full refund to subsidiary 1, as it could have used all of its loss proceeds to offset its taxable income in year 4. Consolidated Net Operating Loss (CNOL) occurs when the losses of the consolidated members of the group exceed the taxable income of members of the earnings group. Under the TCJA, corporate NOLs generated during tax years up to December 31, 2017 cannot be recovered, but transferred indefinitely. (Under previous rules, the company`s NOLs were generally involved for a two-year carryback and a 20-year carryforward.) In addition, many other unused tax attributes (for example. B excess capital losses, tax credits) can be presented and used to reduce the group`s future tax debt. When a tax allocation agreement compensates members for the use of their tax attributes, it is important that it also contains rules to determine the order in which members` attributes are used. If a tax credit or NOL is repatriated before 2018, the IRS returns a tax refund to the parent company, regardless of who generated the credit.
In order to ensure that members receive compensation for the use of their attributes, an agreement should be established to allocate taxes on the distribution and distribution of tax refunds among the members of the group.