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In order to file a consolidating tax return - the LLC must be classified as a corporation - and otherwise woudl be filing a corporate tax return as C-corporation.
So instead of filing two corporate tax returns - the parent corporation may file one consolidated tax return.
That is based on section 1501
An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns.
See regulation here
If the LLC is classified as a partnership under the default classification rules (because there are two members) - it should file a partnership tax return and is not eligible for the consolidating tax return.
If S-corporation elected to be taxed as C-corporation - then shareholders will receive dividends taxable on their tax return.
Also the shareholder who is an employee of that corporation will receive wages - not guaranteed payments.
If you want to be eligible for the consolidated tax return - yes - both entities must be C-corporations.When the LLC (elected to be treated as C-corporation) has a business profit - it will be subject to corporate income tax - but on the consolidated tax return if you choose that route.
The LLC (C-corporation) will pay dividends to shareholders from after tax profit. These dividends are reported on form 1099DIV.
To elect the LLC to be classified as C-corporation - a special election must be done. Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.
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