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Microphone at a Large Conference. How to Determine if Labor Organization Expenses are Chargeable.

Agency Fee Calculations: How to Determine Whether Labor Organization Expenses Are Chargeable

Agency Fee Calculations: How to Determine Whether Labor Organization Expenses Are Chargeable

In determining the chargeability of expenses, a labor organization must look at each type of expenditure it incurs during the year to determine the best way to fairly reflect its chargeability. 

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Following are various common labor organization expenses and possible solutions for determining the breakdown of chargeable versus non-chargeable activity.

  • Expenses such as conferences, meetings, lost time and service provider fees may be easy to distinguish as chargeable or non-chargeable based on the nature of the activities.  The labor organization should review each disbursement individually to determine the allocation between chargeable and non-chargeable expenses.
  • Salaries, employee benefits, payroll taxes and other employee-related compensation are a little more difficult to allocate precisely between chargeable and non-chargeable expenses. The labor organization should conduct a time study of the employees’ daily job functions and require employees to track their time each day working on the various functions of the labor organization. At the end of the year, the labor organization should summarize chargeable job functions versus non-chargeable job functions to determine the chargeable percentage of each employee’s time, then compute an overall chargeable percentage for the entire labor organization and use it to allocate employee-related compensation.
  • Certain expenses, such as some for office administration and computer equipment, are not readily differentiated between chargeable and non-chargeable. It is common to allocate these types of expenses using the combined chargeability of the employees of the labor organization calculated in the previous step.
  • The labor organization should contact each affiliate to which it pays per capita taxes and request a copy of the affiliate organization’s agency fee audit report. If the affiliate is able to provide a report, allocate per capita expenses based on the chargeability percentages included in the report. If not, the labor organization may need to determine that all payments to the affiliate are non-chargeable.
  • If the labor organization produces a newsletter, it will need to determine the chargeability of the expenses incurred in writing, editing, printing, mailing and other related activities.  A common method for allocating newsletter costs is to review each page of the newsletter for chargeable versus non-chargeable articles based on the nature of the article. One can then estimate the total space in the newsletter dedicated to chargeable versus non-chargeable content and apply the same formula to newsletter expenses.
  • Rent and utilities may require another allocation method. Building expenses are often allocated using estimated floor space dedicated to chargeable versus non-chargeable activity.
  • Nonrepresentational-type expenditures such as charitable and community service contributions; lobbying and ballot measures with no implications for contract negotiation, ratification or enforcement; and certain organizing activities should be considered non-chargeable.

After the labor organization has completed its agency fee calculation, it will commonly engage a certified public accounting firm (CPA firm) to audit the calculation and render an opinion on the agency fee. The CPA firm will review supporting documents used in performing the calculation and determine whether, in all material respects, the calculation is fairly presented.

This article is the second in a four-part series on agency fee calculations.  Future articles will cover the objection process and frequently asked questions about agency fee calculations.  Lindquist LLP has extensive experience helping labor organizations meet their agency fee obligations.  Contact Partner Rich Thiermann with any questions.

Rich Thiermann, CPA, is the partner-in-charge of Lindquist LLP’s Orange, California, office.  He has specialized expertise in audit and accounting services for labor organizations.  His labor organization clients span local unions with $4 million in total assets to regional councils with more than $200 million in total assets.  Rich also has extensive experience with agency fee calculations.  Contact him at (714) 257-0100 or rthiermann@lindquistcpa.com.

Our firm provides the information in this e-newsletter for general guidance only.  It does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind.  The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.  Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.  Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer.  The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.

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