J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Treatment of Multiple Corporations

C corporations that have certain intertwining ownership are called “controlled corporations” and are subject to special tax treatment. There are 2 types of controlled corporations:

1. Parent-subsidiary controlled group. One corporation owns (directly or indirectly) at least 80% of the stock of 1 or more other corporations.

2. Brother-sister controlled group. Two or more corporations are owned by 5 or fewer persons (persons include not only individuals, but also estates and trusts), who together possess at least 50% of the total voting power or value of the corporation and more than 50% of the combined voting power or value of all stock.

Example

An individual owns all the stock of Corporation A and 75% of the stock of Corporation B. A and B are a brother-sister controlled group.

The status of a group can change from year to year. For instance, in the brother-sister situation, a sixth shareholder can enter the picture so that the group of corporations is no longer a controlled group.

Advantages and Disadvantages

There are both advantages and disadvantages of a controlled group.

Advantages include:

• Minimizing payroll taxes when an employee works for more than 1 related corporation. Under the “common paymaster rule,” 1 corporation is designated as the paymaster responsible for payroll taxes so that each corporation does not pay payroll taxes that could have been avoided. For instance, in 2012 if a shareholder works for his 2 controlled ...