The AICPA’s six recommended guidelines for the allocation of indirect expenses are:
- Deductible expenses must bear a proximate and primary relationship to the conduct of the activity.
- Deductible expenses include both direct costs and indirect costs.
- Indirect costs include fixed expenses (those which do not change when the unrelated activity is conducted or not conducted) and variable expenses (those which increase or decrease when the unrelated activity is conducted or not conducted).
- The methodology for allocating expenses relating to dual use facilities/personnel is reasonable and consistently followed from year to year, and should not cause the double-counting of any expense.
- The methodology for allocating expenses relating to dual use facilities/personnel is based on the character of the expense involved.
a. Facility costs (rent, mortgage interest, insurance, taxes, security, and utilities) apportioned based on portion of facility used (square footage and time) for each activity.
b. Personnel costs (salary, benefits, and taxes) apportioned based on time spent on each activity.
c. Information technology costs (software, computer services, and internet) apportioned based on allocation of personnel to activity.
- The Office expenses (supplies, printing, postage, and subscriptions) are apportioned based on allocation of personnel to activity.
The AICPA previously provided suggestions to the IRS of various UBI expense allocation methodologies.