ParentCo and SubCo have filed consolidated returns since both entities were incorporated in year 1. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. $$\begin{array} { l c c c }
\text { Year } & \begin{array} { c }
\text { ParentCo's } \
\text { Taxable Income }
\end{array} & \begin{array} { c }
\text { SubCo's Taxable } \
\text { Income }
\end{array} & \begin{array} { c }
\text { Consolidated } \
\text { Taxable Income }
\end{array} \
\text { Year 1 } & \$ 100,000 & \$ 35,000 & \$ 135,000 \
\text { Year 2 } & \$ 100,000 & ( \$ 20,000 ) & \$ 80,000 \
\text { Year 3 } & \$ 100,000 & ( \$ 109,000 ) & ? \
\text { Year 4 } & \$ 100,000 & \$ 190,000 & ?
\end{array}$$ The year 3 consolidated loss:
A) Is carried forward to year 4.
B) Is carried back to year 1 and produces a tax refund.
C) Can be used only to offset SubCo's future income.
D) Offsets ParentCo's year 1 income.

Question

ParentCo and SubCo have filed consolidated returns since both entities were incorporated in year 1. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. $$\begin{array} { l c c c } 
\text { Year } & \begin{array} { c } 
\text { ParentCo's } \
\text { Taxable Income }
\end{array} & \begin{array} { c } 
\text { SubCo's Taxable } \
\text { Income }
\end{array} & \begin{array} { c } 
\text { Consolidated } \
\text { Taxable Income }
\end{array} \
\text { Year 1 } & \$ 100,000 & \$ 35,000 & \$ 135,000 \
\text { Year 2 } & \$ 100,000 & ( \$ 20,000 ) & \$ 80,000 \
\text { Year 3 } & \$ 100,000 & ( \$ 109,000 ) & ? \
\text { Year 4 } & \$ 100,000 & \$ 190,000 & ?
\end{array}$$ The year 3 consolidated loss:
A) Is carried forward to year 4.
B) Is carried back to year 1 and produces a tax refund.
C) Can be used only to offset SubCo's future income.
D) Offsets ParentCo's year 1 income.

Quizplus · Accepted Answer

In year 3, the consolidated group has a loss because SubCo's loss exceeds ParentCo's income, resulting in a negative consolidated taxable income. This loss can be carried forward to offset future consolidated taxable income, including that of year 4. Consolidated tax rules allow the group to use losses in one year to offset profits in others, without restricting the loss offset to the company that incurred the loss.

ParentCo and SubCo Have Filed Consolidated Returns Since Both Entities