What Is a Controlled Group & Why Does It Matter for Taxes?

A controlled group refers to two or more businesses treated as a single entity for specific purposes under federal law. This classification primarily impacts how these businesses comply with tax regulations and manage their employee benefit plans. Understanding whether your businesses form a controlled group is important for maintaining compliance and avoiding potential penalties.

Types of Controlled Groups

Businesses can be classified into different types of controlled groups based on their ownership structures. The three main types are parent-subsidiary, brother-sister, and combined groups, each defined by specific ownership thresholds.

A parent-subsidiary controlled group exists when one corporation, the “parent,” directly or indirectly owns 80% or more of the total combined voting power of all classes of voting stock, or 80% or more of the total value of all classes of stock, of another corporation, the “subsidiary.” For example, if Company A owns 90% of Company B’s voting stock, Company A is the parent and Company B is its subsidiary, forming a controlled group. This structure extends through multiple tiers, meaning if Company B then owns 85% of Company C, all three companies form a single parent-subsidiary controlled group.

A brother-sister controlled group involves two or more corporations where five or fewer individuals, estates, or trusts collectively own at least 80% of the total combined voting power or total value of all stock for each corporation. Additionally, these same five or fewer owners must have identical ownership of more than 50% of the total combined voting power or total value of all stock for each corporation. For instance, if four individuals own 100% of Company X and 100% of Company Y, and their identical ownership in both companies totals more than 50%, Companies X and Y form a brother-sister controlled group. The identical ownership test requires summing the lowest percentage owned by an individual in all businesses.

A combined group is formed by three or more organizations where at least one organization is a parent corporation in a parent-subsidiary group, and that parent corporation is also a member of a brother-sister group. For example, if Company A owns Company B (forming a parent-subsidiary group), and Company A is also part of a brother-sister group with Company C, then Companies A, B, and C could collectively form a combined controlled group.

Ownership Determination and Attribution

Determining whether businesses constitute a controlled group involves complex rules for calculating ownership percentages, which extend beyond direct ownership. These are known as constructive ownership or attribution rules, designed to prevent businesses from circumventing controlled group regulations through indirect ownership arrangements.

Family attribution rules dictate that an individual is considered to own stock owned by certain family members. Stock owned by a spouse is generally attributed to the individual. Stock owned by children, grandchildren, and parents can also be attributed; for example, a parent is considered to own stock owned by their minor children, and a child under 21 is considered to own stock owned by their parents.

Option attribution rules treat an individual as owning stock that they have an option to acquire. If a person holds an option to purchase shares in a company, those shares are counted as if they are already owned by that person when determining controlled group status.

Partnership attribution means that stock owned by a partnership is proportionally attributed to its partners based on their capital or profits interest. Conversely, stock owned by a partner is sometimes attributed to the partnership. For example, if a partnership owns 60% of Company Z, and an individual owns 30% of that partnership, the individual is considered to own 18% of Company Z through attribution.

Trust and estate attribution rules generally attribute stock owned by a trust or estate to its beneficiaries. Similarly, stock owned by a beneficiary of a trust or estate can be attributed back to the trust or estate itself.

Corporation attribution rules specify that if an individual owns 50% or more of the value of a corporation’s stock, that individual is considered to own a proportionate share of any stock the corporation owns in other entities. For instance, if an individual owns 60% of Company D, and Company D owns 70% of Company E, the individual is considered to own 42% (60% of 70%) of Company E through attribution.

Key Regulatory Consequences

Classification as a controlled group carries significant regulatory implications, particularly for employee benefit plans and tax compliance. Businesses determined to be part of a controlled group are generally treated as a single employer for many federal purposes, impacting various aspects of their operations.

For employee benefit plans, such as 401(k)s and pension plans, controlled group status means that all employees across the group are treated as if they work for one employer. This impacts non-discrimination testing, contribution limits, and coverage requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. For instance, if a qualified retirement plan must cover a certain percentage of non-highly compensated employees to pass coverage tests, those calculations must include all eligible employees of the entire controlled group. Failing these tests can result in a plan losing its qualified status, leading to adverse tax consequences.

Tax implications are also substantial. Certain tax benefits and limitations are aggregated across controlled group members. For example, the Section 179 expense deduction, which allows businesses to deduct the full purchase price of qualifying equipment and software, has an annual limit that applies to the entire controlled group, not to each individual business. The maximum amount that can be expensed under Section 179 for 2025 is $1,220,000. All businesses within the controlled group must share these aggregated limits.

The Affordable Care Act (ACA) compliance is another area significantly affected by controlled group rules. Businesses are considered Applicable Large Employers (ALEs) if they have 50 or more full-time equivalent employees (FTEs) in the preceding calendar year. For controlled groups, the FTEs of all members are combined to determine if the 50-employee threshold is met. If the group collectively meets the ALE threshold, all members are subject to the employer shared responsibility provisions, potentially incurring penalties under Internal Revenue Code Section 4980H if they do not offer adequate health coverage to their full-time employees.

Payroll taxes can also be affected, as certain wage bases and thresholds for taxes like the Federal Unemployment Tax Act (FUTA) are aggregated across controlled group members. This prevents businesses from segmenting their workforce to avoid reaching FUTA wage base limits.