Using management fees to legally allocate profits between related parties

A Janover client in the manufacturing industry owns 90% of a C-Corporation that is extremely profitable. The parent company was an S-Corporation that had distributed losses to its owners that those owners were not able to utilize, as they were deemed to be “not at risk” (that is, they had no basis in the entity). However, the tax law does not allow for losses of an S-Corp to offset profits of a C-Corp subsidiary.

Janover performed a detailed study to analyze the value of all services the parent was providing to the subsidiary. We then used the information gathered to enable the parent to enter into a Management Services Agreement with the C-Corp subsidiary, including a reasonable profit on services to the parent company.

This arrangement has enabled management fees of over $20 million to be paid to the parent and has resulted in tax savings of over $8 million. Further, because the Management Agreement was supported in detail, this financial arrangement has withstood two audits by the IRS with no change in the management fees (or any other material assessment).

Crafting business arrangements that untangle difficulties, create financial benefit and stand up properly under IRS scrutiny is another of the ways Janover creates “relationships beyond calculation,” working with clients to solve problems and open opportunities. To learn more, contact Janover at info@Janoverllc.com

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