Holding Company Taxes

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Holding companies are business entities formed as either a corporation or limited liability company (LLC), formed to own other companies. Typically, a holding company doesn’t manufacture anything, they do not sell any products or services, or even conduct any other business operations. Instead, holding companies hold the controlling stock in other companies.

For example, one of the most well known holding companies is Berkshire Hathaway. This company is owned by Warren Buffett primarily, but Berkshire Hathaway owns GEICO, Dairy Queen and Fruit of the Loom, along with a variety of other businesses. Another example of a holding company is Alphabet. Alphabet owns Google, YouTube, Nest and a variety of other companies.

What is the Purpose of a Holding Company?

When a business is thriving, it can use the creation of another business for many reasons. First, consider business revenue, where the owner lives, and the overall long-term goals for the business. When setting up a subsidiary company, the holding (parent) company, can better enter into a risky business with less risk. This is because even if the subsidiary fails, the parent company is not liable for the debt.

What Can You Fund a Holding Company With?

  • Limited liability companies
  • Private equity funds
  • Brand names
  • Patents
  • Copyrights
  • Hedge funds
  • Publicly traded stocks
  • Anything that has value

Holding Company Tax Implications

When you form a holding company, it can reduce and simplify taxes. This is because you will be able to file a consolidated filing, instead of one for each company. This reduction is not guaranteed, but the potential reduction comes from moving income to a lower tax bracket, due to income shifting.

The IRS has regulations in place that are used to deter parent and subsidiary companies from moving taxable income between one another. This began in 2013, with a law that an international subsidiary cannot use American intellectual property without paying the parent company.

This is because a parent company is not liable for subsidiary taxes, but it must be obvious that the two are operating independently. If the IRS sees that the two companies are truly one company, they will request back taxes.

How Holding Companies File Taxes

The IRS only requires one form to form a holding company, because the holding corporation files a single tax return for the entire group. This consolidated tax return includes all earnings, losses, and profits for each subsidiary company. It also requires it for the holding company to file the return.

Strategies to Defer Taxes

Holding company taxes are already complicated, and there are also multiple methods that allow for deferring taxes. One method is to have many shareholders. This can include making separate holding companies corresponding to every shareholder within the corporation. This delivers flexibility for shareholders, but also for the holding companies. In this case, the holding companies control each person’s dividend payments.

Retirement Funds

You can also defer taxes by utilizing retirement funds. In this case, you would need to use holding company assets similar to how you would use a pension, only using the assets upon retirement.

Create a Trust

Forming a trust, such as a family trust, is a great option to hold company shares. The holding company and your family can benefit because you will have the holding company receive dividends via beneficiary status. These dividends are usually tax-free, thus avoiding tax payments.

Creditor Protection

When you believe you might be sued, it is possible to essentially shield your funds from creditors. This is done by sending company profits to your holding company via dividends. If your business needs access to cash, the funds can be sent back. Overall though, it keeps your profits safe from the eyes of creditors without actually removing it from the business.

Splitting Income

Another option is to split the income by having multiple people own your holding companies. This will divide the dividends, which in turn, decreases the taxes owed on them.

Benefits of a holding company

  • Asset Protection: By placing operating companies and the assets they use in separate entities, it provides a liability shield. The debts of each subsidiary belong to that subsidiary, rather than to the parent company. If there is a creditor of the subsidiary, it cannot reach the assets of the holding company or another subsidiary.
  • Reduce Risk: By being able to operate completely independently, holding companies have the option to reduce their risk by taking risks through the subsidiary. For example, should a subsidiary go into a risky industry, and fail, the holding company will not need to worry about its own assets.
  • Flexibility: When forming a holding company, your business can own a variety of businesses in unrelated industries. It doesn’t matter if the owners and managers of the holding company don’t know about those businesses. Each subsidiary has its own management to run the day-to-day operations.

Get Help Filing Your Holding Company Taxes

Using a lawyer or business attorney can help you to file your holding company taxes. This is essential because there are many tax implications should you file incorrectly. If you file at the wrong time, then you will incur a penalty as a percentage of the amount of unpaid tax. If you do not use an attorney you may also miss out on different benefits and possible deductions. Overall, it is essential that you use a lawyer to get help filing your holding company taxes. This will help you to benefit from deductions, avoid penalties, and avoid overpaying on your taxes.

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