There is an abundance of information surrounding the aggregation rules to determine whether or not a company is part of a controlled group, such as a parent-subsidiary group, brother-sister group or a combined group. The rules apply not only to corporations but also to partnerships and other forms of entities. In addition, the rules, explanations and examples provided are complex — leaving many taxpayers, and even some practitioners, confused on how to apply them.
But understanding how this works is important. If your business is deemed by the IRS to be part of a controlled group, it may miss out on numerous, favorable small business taxpayer exceptions. These exceptions exempt small businesses from requirements such as:
- Applying the business interest expense limitation,
- Maintaining inventories,
- Using the overall accrual method of accounting,
- Capitalizing certain costs under Section 263A, and
- Accounting for long-term contracts using the percentage-of-completion method.
Particularly take note of the impact your status could have when contemplating the new business interest expense limitation created by the Tax Cuts and Jobs Act. A “small business,” which is an entity with an average annual gross receipts of $25 million or less, is exempt from the 30% limitation. However, if that small business is considered part of a controlled group and is required to aggregate related entities, combining all gross receipts and ultimately exceeding the $25 million threshold, that key exemption will be lost.
We are working with our clients every day to help them understand the potential impact of these rules. Be sure you are working with advisors well-versed in the aggregation rules to know how they could apply to your tax situation.
Please contact a member of your service team, or contact Lisa Loychik at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.