What is an Affiliated Group
An affiliated group is two or more corporations that are related through common ownership, but are treated as one for federal income tax purposes. An affiliated group consists of a parent corporation and one or more subsidiary corporations. The parent corporation must own at least 80% of its subsidiary's stock and consolidates the subsidiaries' financial statements with its own.
BREAKING DOWN Affiliated Group
Affiliated groups are required to file consolidated tax returns. A disadvantage of the affiliated group designation is that it prevents larger companies from splitting into smaller ones for the purposes of allocating more of their income to lower tax brackets or avoiding the alternative minimum tax. An advantage is that companies within the group can use their ordinary losses to offset each other's ordinary income. Since losses can be used for these purposes, it may often be accepted if one of the subsidiaries is not successful in its business, as it helps to mitigate the tax burden of the others in the group.
Example of an Affiliated Group
XYZ corporation is the parent company of ABC company and DEF Incorporated. XYZ owns over 80% of both ABC and DEF's stock. While XYZ and ABC are thriving, DEF sells pagers and rotary telephones. DEF Incorporated has a huge loss every year. XYZ and ABC use DEF's losses to offset their own profits and the entire group ends up paying lower taxes as a result.