Question

Tax issues are definitely a concern of consolidated entities. Using external resources, please explain in 200 words or more some of the challenges faced by the accountant for tax purposes regarding consolidated entities. Please use proper citation when posting your response on the discussion board.

Answer 1

When accountants consolidate entities, there are many challenges faced like tax issues and it needs to be resolved. If the consolidated entities show combine taxes, it should maintain that consistency for future years. One demerit is Consolidated entities do not allow legal existence of separate entities. One advantage of consolidation is to combine taxes and pay at one place. While consolidating, parent entity follows these steps: finding out the taxable income, gains & losses; inter-company transactions; subsidiary’s what item should be excluded or included in net income; separate subsidiaries profit and combining them. In some cases where the subsidiary entity is small, they do not have their own accountants, so they are dependent on parent company’s accountants. There are many advantages and disadvantages of tax issues regarding consolidated entities. Advantages are netting the profits of one entity with the losses of the other, netting capital gain and losses, the parent company gives overall presentation of taxes. Disadvantages are accumulated profits limit the use of tax credits, transactions between the entities are recorded for future years and deferred profits are mostly considered as losses. If combined entities pay separate taxes, they will take the advantage  of being separate entities rather than being consolidated. As combined entities are subject to tax audit, there are less chances that separate entities will be liable for tax audit.