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What is the best way to determine intercompany fees when two companies share key resources and overhead expenses?

By: Rick Gossett

What is the best way to determine intercompany fees when two companies share key resources and overhead expenses? If the companies are audited in this area what does the IRS look for?

Answer: One approach to calculating intercompany management fees is to analyze the labor being spent on each business and then allocating overhead costs as a percentage of labor to determine a total intercompany fee. Also, there may be a particular legal bill or other unique costs that may be charged directly to a subsidiary or affiliate company in addition to the normal intercompany fee.

Percentage of sales and other formulas are accurate in some situations, but you would still need some type of quantitative analysis to demonstrate that the formula is accurate. The IRS does not have a standard formula for intercompany management fees; however, they look at reasonableness and consistency in order to determine the economic justification and that the taxpayer is not arbitrarily adjusting intercompany fees in order to affect or manipulate the tax liabilities of the businesses.

In addition to consulting with your local business CPA to help establish your intercompany fees and policies, you can review industry articles and considerations with intercompany fees and IRS examination implications at the following websites:

Published: August 5, 2013
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Rick Gossett

As COO of Tarkenton Companies for more than 20 years, Rick has been responsible for business software development, unique partnerships, business educational content and consulting, and more. Rick was the originator of Tarkenton Companies’s consulting service and initially handled all of the questions himself. Prior to joining Tarkenton Companies, Rick owned and operated a private practice as a CPA. Prior to that, he was a Senior Manager at Pannell Kerr Forster in tax and audit, as well as Principal in Ernst & Young's small business advisory group.