A controlled group is a business classification defined under U.S. tax law where two or more companies are owned or controlled by the same individual or entity, often at an 80% ownership threshold. The IRS aggregates these businesses as one for various tax rules to prevent circumvention of tax limitations by splitting business activities and employees across entities.

The IRS recognizes three primary types of controlled groups:

  1. Parent-Subsidiary Controlled Group: One parent company owns at least 80% of one or more subsidiary companies’ voting stock or value. For instance, if Company A owns 85% of Company B, both form a parent-subsidiary controlled group.

  2. Brother-Sister Controlled Group: Five or fewer common owners control multiple corporations each owning at least 80% combined voting power, and these ownership interests overlap. For example, if Jane owns 90% of Company X and 80% of Company Y, these companies form a brother-sister group.

  3. Combined Controlled Group: A hybrid of the parent-subsidiary and brother-sister groups, involving overlapping ownership among multiple parents and subsidiaries.

Why Does the IRS Care About Controlled Groups?
The IRS enforces controlled group rules to ensure businesses cannot unfairly multiply benefits or tax advantages by spreading employees or assets across related companies. This affects areas such as:

  • Employee Benefits: Retirement plans like 401(k)s must treat controlled group employees as a single group for contribution and coverage limits. Employee stock options and group insurance benefits also have aggregated limits.
  • Tax Credits and Deductions: Credits like the Work Opportunity Tax Credit aggregate across the controlled group, limiting total claims.
  • Net Operating Losses (NOLs): Deductions related to Net Operating Losses often apply to the group as a whole.
  • Affordable Care Act (ACA) Mandate: Businesses within a controlled group combine their employee counts to determine applicability of the ACA employer mandate, which kicks in at 50 or more full-time equivalent employees.
  • Depreciation Limits: Limits under the Section 179 deduction apply to the entire controlled group collectively.

Examples:

Example 1: Brother-Sister Group
Sarah owns 90% of “Sarah’s Italian Kitchen” and 90% of “Sarah’s Sports Bar.” Both companies are considered a controlled group, so when setting up employee retirement plans or claiming tax credits, limits apply to both restaurants combined, not separately.

Example 2: Parent-Subsidiary Group
Global Holdings Inc. owns 85% of Tech Solutions LLC and 90% of Innovate Software Corp. This parent-subsidiary group combines employee counts for ACA compliance and other tax purposes.

Managing Controlled Groups:

  • Consolidate employee benefit plans to ensure uniform coverage.
  • Monitor aggregated tax credit and deduction limits carefully across entities.
  • Maintain accurate ownership records, including stock, options, and voting rights.
  • Consult tax professionals to ensure proper classification and compliance.

Common Pitfalls:

  • Misunderstanding ownership thresholds can lead to misreporting.
  • Treating each business as entirely separate for tax purposes can trigger penalties.
  • Neglecting to aggregate employee counts for the ACA mandate risks costly fines.
  • Overlooking intercompany transactions prices can invite IRS scrutiny.

Understanding controlled groups is essential for any business owner with multiple related companies to avoid tax complications and ensure proper compliance. For detailed guidance, consider IRS regulations under IRC Section 1563 and related IRS publications.

Additional Resources:

For authoritative IRS rules, see the IRS Controlled Groups webpage.