What are the five steps in calculating consolidated taxable income?
What will be an ideal response?
Answer: Generally, the five steps are:
1) Compute each group member's taxable income (or loss) based on the member's own accounting methods as if the corporation were filing its own separate tax return.
2) Make adjustments to each group member's taxable income for certain intercompany transactions, inventory adjustments, dividends received, excess loss (negative investment basis) accounts, and built-in deductions.
3) Remove certain gains, losses, and deductions from each member's taxable income since they must be computed on a consolidated basis (e.g., NOLs, capital gains and losses, Sec. 1231 gains and losses, charitable contribution deductions, dividends-received deduction, percentage depletion under Sec. 613A).
4) Steps 1 through 3 result in the member's separate taxable income. Combine these amounts to equal the group's combined taxable income.
5) Adjust the group's combined taxable income for items reported on a consolidated basis to equal the consolidated taxable income.
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