If you’re running a holding company and generating revenue from that company, it’s important to know how to file taxes for a holding company. Taxes are a part of doing business. It doesn’t matter if your tax resolution is through an accountant or through the IRS, you still have to pay what’s owed. Income is income no matter where it’s coming from, and in this article I’ll explain how to file taxes for a holding company.
If you are planning on filing taxes for a holding company, there are a few tax-related issues you should be aware of. A holding company is an organization or corporation (it or its shareholders) that owns controlling interest in one or more business companies thus serving as a parent for those business companies. If your company is organized as a holding company, it does not make sense to file free form (because you are not earning any net income from it). It is always advantageous to file the taxes through a corporate entity like the holding company. However, the Internal Revenue Service requires that all taxpayers must file using personal single status in order to avoid filing separately. Moreover, the IRS requires that all K-1 accounts must fully include taxes and income before its final allocation to share holders and debtholders at the end of year. Failing to do so can cause unpredictable distributions and will not help control tax within your organization.
If you own a holding company, you’ll need to file your taxes differently than if you were working as an individual. Here’s what you need to know:
First, let’s talk about what a holding company is. A holding company is a corporation that owns stock in other corporations. The purpose of this arrangement is so that one corporation can collect dividends from the other corporations without having to pay any taxes on those dividends.
To file taxes for your holding company, follow these steps:
1) Determine how much money came into the corporation during the year and how much went out (the amount left over). This includes any dividends paid by other corporations that are owned by your corporation.
2) Calculate your taxable income by subtracting any deductions from gross income (total income before any deductions). Gross income includes all sources of revenue earned by your business during the year–this includes sales made through your website or storefront as well as income from investments held within the corporation itself (dividends paid out by other companies owned by this one).
A holding company, or ‘parent company’, is set up to own a controlling stake in at least one subsidiary company.
There are several strategic benefits associated with a Holding Company. These include protecting assets in the event of downturn in trade, or legal claims against the company.
But what about tax?
There are notable tax benefits and reliefs that a Holding Company structure enables. In this blog, we will outline some of the most significant.
Tax reliefs for subsidiary businesses
Subsidiary companies owned by a Holding Company can pass assets between them tax free. This enables a subsidiary to easily move assets when required. Businesses in a group structure can also surrender tax losses to profit making group companies. This enables the profit-making companies to reduce tax liability.
Selling the business tax free
A holding company structure could allow a trading subsidiary business to be sold tax free. If the Holding Company has owned at least 10% of a subsidiary company’s shares for 12+ consecutive months, these shares can be disposed of without a Corporation Tax liability.
This is the Substantial Shareholding Exemption (SSE). The SSE can be useful if the remaining Holding Company plans to reinvest funds in the next venture.
Inheritance Tax Reliefs (IHT)
Business Property Relief (BPR) effectively reduces the value of assets which are subject to Inheritance Tax on transfer. Usually, a non-trading investment company (i.e., a Holding Company), would not qualify for BPR.
If a holding company is paired with a trading company within a wider group structure, the full value of the group may be relieved from Inheritance Tax, including investments.
What Is a Holding Company?
A holding company is a company that does not have its own business operations. Instead, the holding company is used to own shares in other companies. The shares of stock that the holding company can own consist of publicly traded stock, LLCs, hedge funds, brand names, copyrights, patents, and more.
When a holding company owns over 50% of a company’s stock, that company is considered a subsidiary of the holding company. The holding company has direct control of the subsidiary’s business operations by way of majority shareholder voting. However, in some cases the holding company chooses to allow the subsidiary to function independent of the holding company.
Holding Company Tax Implications
Even though the parent company typically remains in control of its subsidiaries, the companies are considered legally separate. Because the companies are recognized as separate, each company pays its own taxes as it corresponds to their specific income. Regardless of this distinction, a holding company has the ability to take advantage of certain tax benefits that its structure allows for.
For example, utilizing a holding company structure can help you reduce and simplify your taxes. Simplification is achieved through the ability to consolidate filings, rather than file a return for each individual company. The possibility to reduce your taxes can occur when moving income to a lower tax jurisdiction through the process of income shifting.
Holding Company Strategies for Deferring Taxes
If you have a holding company, there are a number of strategies that you can implement to help you defer taxes. When you directly own shares in a company, any dividend payments from that corporation are subject to taxes on your personal tax return. However, through use of a personal holding company, you can set up the dividend payments from your shares to be paid to your holding company. In this case, those dividend payments are generally tax-free.
Here are some of the strategies that you can implement to defer taxes with your holding company:
Create Shareholder Holding Companies. One of the strategies you can implement to achieve greater flexibility is setting up a separate holding company for each of the shareholders in your corporation. This allows each holding company to direct the dividend payments to each of the shareholders. So, your company can pay dividends to the holding companies tax-free. Those holding companies can then pay dividends to their specific shareholder based on the individual’s personal needs. You may have an S-Corporation holding company.
Split the Income. Consider having additional members of your family share ownership of the holding company. By doing this you will be allowed to pay dividends to those family members (such as a spouse or anyone else in the family), which allows the dividend tax burden to be shared. However, keep in mind that it is not always advisable to issue shares to your children or other family members that are minors. If you are interested in this, consider utilizing a family trust.
Create a Trust. Another option is holding the shares of your company in a family trust, as dividends that are distributed to your holding company are generally tax-free. Any of the dividends paid by your company to the family trust will receive the same tax-free treatment achieved when the holding company directly owns shares of the company. Additionally, the members of your trust can include anyone in your family. This setup will allow you to distribute dividends as you see fit to the family members you have designated as beneficiaries.
Establish Protection from Creditors. Any profits from your company can be paid in the form of dividends to your holding company. Should your company require, the funds can always be paid back when cash is needed. Through this method, those profits are safe from creditors and will remain within your business.
Funds for Retirement. Holding companies allow you to accumulate assets over time that can be used as a form of pension or nest egg. When it comes time, these assets can be put to use in your retirement.
Can Holding Company Subsidiaries File Separate Tax Returns?
Generally, yes, subsidiary companies can file their own separate tax returns. However, there is the option for a holding company to consolidate business tax returns. Note, however, that if a holding company wishes to consolidate their tax returns, each subsidiary of the holding company must agree to it. Holding company tax procedures can get fairly intricate depending on its structure and subsidiary companies. While each subsidiary has the option to file taxes separately, holding companies generally have more to gain by consolidating their returns.