Corporations are legal entities and taxed the same as people. Some states require affiliated groups or corporations to file a federal consolidated income tax return. Combined tax returns are filed by companies that are nationwide chains and filed in each state that in which they conduct business.
Consolidated Tax Return
A consolidated tax return is filed with the Internal Revenue Service (IRS) by a group of affiliated companies or a parent company. It combines all their tax reports into one filing. The consolidated tax report includes each company's assets, profits, losses and liabilities.
Combined Reporting
Combined reporting is a state tax filing method where members of a commonly controlled group of businesses, called a unitary group, are required to combine the profits it earned in every state. The unitary group's combined net income is used to calculate its total worldwide earnings which is taxed as income by each state in which it operates.
The Difference
A consolidated tax return is filed with the IRS by a parent company or a corporation that owns a group of affiliated companies. A combined tax return is filed with a state. It ensures reported income from localized businesses and multistate corporations are fairly reported and both types of businesses are taxed equally.