The American Institute of CPAs has sent a set of proposed guidelines to the Internal Revenue Service recommending how the IRS should deal with the allocation of unrelated business income expenses of tax-exempt organizations for dual-use facilities and personnel.

The AICPA sent a comment letter last week to the IRS proposing a number of guidelines for the allocation of indirect expenses:

• Deductible expenses should bear a proximate and primary relationship to the conduct of the activity.

• Deductible expenses can include both direct costs and indirect costs.

AICPA building in Durham, N.C.
AICPA building in Durham, N.C. Photo: AICPA

• Indirect costs should include fixed expenses (those that don’t change when the unrelated activity is conducted or not conducted) along with variable expenses (expenses that increase or decrease when the unrelated activity is conducted or not conducted).

• The methodology for allocating expenses relating to dual-use facilities/personnel should be reasonable and consistently followed from year to year, and it should not cause the double-counting of any expense.

• The methodology for allocating expenses relating to dual use facilities and personnel ought to be based on the character of the expense involved:

• Facility costs (such as rent, mortgage interest, insurance, taxes, security and utilities) should be apportioned based on portion of facility used (square footage and time) for each activity;

• Personnel costs (including salary, benefits and taxes) ought to be apportioned based on the amount of time spent on each activity;

• Information technology costs (such as software, computer services and internet use) should be apportioned based on the allocation of personnel to activity; and

• Office expenses (supplies, printing, postage, and subscriptions) should be apportioned based on allocation of personnel to activity.

The AICPA recommended the IRS allow the use of gross revenue, from each activity, to allocate direct or indirect expenses as long as there’s no difference in the prices charged to earn unrelated versus related revenue. The provision is supposed to be for organizations that aren’t able, or for which it is administratively impractical, to maintain or create records on the activities in which dual-use facilities and personnel are employed and the associated expenses are clearly distinguished as related or unrelated.

The AICPA also suggested the IRS should provide a simplified method for small businesses to determine the expenses that are deductible against unrelated business income. Small organizations lack the resources to adequately document the information needed to identify the expenses for dual-use facilities and personnel used in related and unrelated activities, the AICPA noted.

The letter included some examples to show how the recommended guidelines would be applied.

Michael Cohn

Michael Cohn, editor-in-chief of, has been covering business and technology for a variety of publications since 1985.