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Holding Company Taxes

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A holding company (also referred to as a parent or umbrella company) is a company devised to house and manage one or more subsidiary companies. In addition to enhancing overall asset protection and privacy, holding companies can create unique financial benefits for business owners.

Through strategic asset allocation, company shareholders can utilize holding companies to consolidate taxes for multiple companies. A common strategy is to shift funds from the subsidiary companies to the holding companies in order to defer or minimize personal and business tax responsibilities.

If you own multiple businesses, you might find that consolidating your assets into one holding company is ultimately worth your time and resources.

Consolidated Filings into One Schedule O

Depending on how many individual businesses you own, filing a tax return for each can be incredibly time consuming and costly. Even the most adept business owner will most likely require the assistance of a CPA or other paid preparer. The fees for filing individual tax returns alone can be enough to motivate you to find other options. That’s where consolidating your tax filings comes in.

Holding companies that own 80% or more stock in their subsidiary companies have the opportunity to consolidate their tax filings into a single Schedule O. A Schedule O, or Form 1120, is the form the IRS uses to report earnings between multiple “component members” of a corporate structure or holding company.

When filing a Schedule O, all organizations associated with the holding company must consolidate their tax information. That means you can’t pick and choose which subsidiary companies to include on your Schedule O. The consolidated return will list all the income and expenses of each subsidiary company and provide the holding company with its own single taxable income amount.

Income Shifting From ABCs to
Holding Companies and More

There are various tax strategies to consider when filing consolidated returns, and not all of the strategies are devoid of risk.

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For example, a common strategy for business owners to defer taxes involves shifting some of the profits from subsidiary companies to the holding company. The goal with this strategy is to shift income subject to a higher tax bracket to a company subject to a lower tax bracket. Once the income is shifted, the holding company receives a tax break. This only works, however, if the holding company is actually in a lower tax bracket which usually means the company is located in another country. The IRS cracked down on income shifting in 2018 with new tax laws that keep a closer eye on companies that divert funds out of the U.S.

Another tax strategy involves sending profits from subsidiary companies to the holding company in the form of dividends. Depending on how the holding company treats these dividends, they can be considered exempt from taxation. To achieve this, many companies choose to create separate holding companies for each shareholder in the subsidiary companies. That allows more flexibility in dividend payments and keeps the holding companies in lower tax brackets.

When shareholders split their interests into individual holding companies, they also create the opportunity to establish trusts in which their dividends will be deposited. These trusts can be held by the owner, their spouse, or their children. Dividends are then distributed to the holding company as the beneficiary and are usually tax-free in most cases.

Holding Company Tax Disadvantages

Before electing to file consolidated returns, it’s crucial that the owners and interested parties of the holding company are fully aware of the implications and obligations involved. Once a motion is made to file a consolidated return in the form of a Schedule O, all subsequent tax filings must be made in this way. That also means that any future subsidiary companies acquired by the holding company must consolidate their earnings as well.

While special exemptions can be granted by the IRS, you’ll want to make sure that the benefits of filing a consolidated return outweigh the potential loses for future business ventures and acquisitions. If a subsidiary is in a significantly lower tax bracket, you might end up actually losing money when you consolidate tax filings to the holding company.

It’s also important that a holding company retain top-level legal and financial counsel to ensure all tax laws and guidelines are followed. For some business owners and investors, the complications of holding company taxes can seem daunting, making hiring expert counsel all the more worthwhile.

Final Thoughts

Forming a holding company is ultimately an excellent strategy to consolidate the earnings and liabilities of multiple subsidiary companies. The business structuring move allows companies to file consolidated tax statements and can even allow for deferred tax filings. However, the IRS keeps a close eye on these business arrangements, making expert legal and financial counsel a must.

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