AR between intercompanies

Technical topics regarding tax preparation.
#1
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Pros, I hope everyone is well. I am about to finalize a 1120s for a parent company who owns 8 subsidiaries for 2018. One subsidiary develops a nutritional supplement, which they sell whole sale to third party distributors and to other subsidiaries of the parent company who are retail supplemental stores similar to GNC. All these entities are consolidated into one tax return as stated above. They file on the cash basis. My question relates to the sales at the end of the year between the inter companies. The company which develops the supplement has AR of 200k from the retail subsidiaries. On the cash basis we will not recognize this. Of this 200k, the supplement subsidiary also shows 100k of COGS, which actually has been shipped to the subsidiaries. My question is this allowed to be COGS, and written off on the cash basis even though it is between the same owned companies? Thank you for any insight.
 

#2
Nilodop  
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I quit reading when I read this: Pros, I hope everyone is well. I am about to finalize a 1120s for a parent company who owns 8 subsidiaries for 2018. ... All these entities are consolidated into one tax return as stated above.. Unless the "subsidiaries" are SMLLCs that are disregarded entities, in which case it's unusual to call them subsidiaries, the 1120S can't be part of a consolidated return. Or is that. a typo, and the word "a" doesn't belong?
 

#3
Nilodop  
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But then I remembered this. viewtopic.php?t=5349
 

#4
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Nilo, thank you. They are SMLLC disregarded entities all owned by the parent LLC which is taxed as an S corp. It is a consolidated return. I hope this helps. The other topic you show is the same entity. It has grown :). Different matter though. Thank you for any insight.
 

#5
Nilodop  
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It is a consolidated return.. No, it's not. But let's move on from there.

The entities, all of them save the S corporation, are disregarded by IRS. So no, they cannot deduct expenses or costs between or among them. Neither can you if, for example, you are a sole practitioner whose business is in an SMLLC that is disregarded.

But I can't address the state tax treatment.
 

#6
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I drafted a wordy, somewhat formal, and completely authoritative explanation of what's going on here, including what's needed, and why it's needed, and what's not needed and why not, but by the time I had written it all out, and corrected my spelling and punctuation glitches, Philadelphia Len had submitted his marvelously compact precis [just above] of what's going on and what's needed. And then I noticed the refrigpbrerator was laboring to keep its contents cold so I helped out over there, too. And jettisoned my tedious and bloated draft submission for the forum...
;) :)
 

#7
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Nilo, I dont understand. Are you saying these entities need to filed on separate returns and not one S corp return? The S corp owns 100% of the SMLLCs. Or am I just wording this wrong, and it is something else than a consolidated return? And regarding the LLCs not being able to show income on one entity and expense on the other, are these eliminating entries? Thank you.
 

#8
Nilodop  
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Your third sentence describes it. Yes, eliminating entries, if you keep separate books/records for eac entity.
 

#9
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It is a consolidated return.

As Nilodop stated, no it isn’t. Your use of the words “parent” and “subsidiaries” is similarly misplaced. Consolidated/Parent/Subsidiary are C-corp concepts (and involve regarded entities). Your situation involves one regarded entity and a bunch of disregarded entities. Given all of this, the answer to your question is still a big “No.”
 

#10
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Somewhere there's a definition of "disregarded entity" that goes something like "a legal entity the separate existence of which is disregarded for income tax purposes." Yes, it's a separate entity for legal purposes, like getting sued, and yes, it can keep a separate set of books, and they may or may not balance, and all that, but when it comes time to do the income tax returns, the "disregarded entity" and its owner are one and the same, because the **separate existence** of the disregarded entity is .. uh .. it isn't. Because there isn't a separate existence, by definition!
 

#11
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Thank you all. Okay, I was thinking you were saying a separate return had to be done. I am curious how would you word this combination of financial info for the tax return. I understand a separate set of books is needed. They are all one set of numbers on the tax return I would think? What is the wording here? Thank you.
 

#12
Nilodop  
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Anything you want to call it except consolidated. See sections 1501 through 1505 plus some others plus extensive regs., none of which apply in your facts.
 

#13
Chay  
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wwwcpa1biz wrote:They are all one set of numbers on the tax return I would think?

Yes and no. You're going to have to consolidate everything for the figures on the 1120-S, but you'll also need to include a breakdown in the K-1 packages in order for the shareholders to apply the passive activity and at-risk limitations as well as calculate qualified business income.

In response to your original question about writing off the nutritional supplement that was sold: it's possible you may be able to do this if the inventory is no longer treated as inventory after ownership passes to the acquiring company. It sounds like this isn't the case in your facts, but I wanted to mention that for completeness' sake.
 


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