IRC Section 1563: The Controlled Group Fallacy

If you operate multiple corporations, you might assume each one entitles you to its own set of tax benefits—separate Section 179 limits, additional credits, or even expanded retirement plan flexibility.

Unfortunately, the tax code doesn’t see it that way. Hidden within IRC Section 1563 are rules that can quietly collapse your corporations into a single “controlled group,” dramatically limiting the deductions and credits you thought you were multiplying.

Here’s what you need to know.

Under Section 1563, the IRS evaluates who owns and controls your corporations. If the ownership structure meets certain thresholds—either directly or through attribution among family members, entities, or even stock options—the IRS treats all related corporations as one economic unit. This combined unit, known as a “controlled group,” receives only one set of key tax benefits, no matter how many corporations exist on paper.

This can reduce or eliminate tax advantages you expected. For example, businesses within a controlled group must share one Section 179 deduction limit, one accumulated earnings credit, and one pool of R&D tax credits. Employee benefit plans must meet coverage rules across the entire group. And while each corporation still files its own return, the controlled group must coordinate to allocate benefits properly—otherwise, the IRS will make the allocation for you.

Controlled group status is based purely on ownership, not on business operations. The rules generally fall into three categories:

1. Parent-subsidiary groups, where one corporation owns at least 80 percent of another

2. Brother-sister groups, where five or fewer common owners control multiple corporations and share more than 50 percent identical ownership

3. Combined groups, which blend the two

Complicating matters further, attribution rules may treat you as owning stock held by your spouse, children, parents, certain trusts, or entities you own—sometimes pulling corporations together unexpectedly.

The good news: with advance planning, you can often avoid or unwind a controlled group legally and safely. Strategies may include adjusting ownership percentages, adding new owners, restructuring voting rights, or using non-corporate entities such as LLCs for new ventures. And if a controlled group is unavoidable, proactive allocation of deductions ensures you—not the IRS—decide where your tax benefits go.

Your next step? Check out our Proactive Tax Strategy & Planning for Business Owners. While you're there, take the 2-minute Tax Strategy Assessment and get some free tax strategy ideas.

We provide these articles as general information and not individualized tax advice.  They do not constitute a client relationship with you, and any information provided here should be applied at your own risk.