A management fee is a charge from one entity in a group, often a parent or management company, to the other entities for services it provides them, such as billing, finance, HR, software or marketing. It is recorded as income in the entity that charges it and as an expense in each entity that pays it. It can be set as a reimbursement of cost or as cost plus a markup. Under Section 482 regulations, charges between businesses under common control are measured against an arm's length standard. The tax treatment depends on the facts, so agree the method with a CPA.
What is a management fee?
It is a charge for shared services inside a group of related businesses. One entity employs the central team or pays for the shared tools. The other entities pay it for the work done on their behalf. In a multi-location group, the charging entity is often a parent or a separate management company, and each location entity pays a monthly fee.
How is it different from a cost allocation?
A cost allocation splits an actual cost by a driver, such as revenue collected. A management fee is the charge that results. It can be:
- A reimbursement of cost. Each entity pays its share of what the services actually cost.
- Cost plus a markup. Each entity pays its share plus a percentage on top.
- A fixed or percentage fee. Set in a written agreement, such as a flat amount a month or a share of revenue.
Which one fits is a tax and legal question, not only a bookkeeping one.
How is a management fee recorded?
In both sets of books, on the same date, for the same amount. A worked example: a management company charges Denver LLC $6,282 for August.
| Books | Debit | Credit |
|---|---|---|
| Management company | Due from Denver LLC $6,282 | Management fee income $6,282 |
| Denver LLC | Management fee expense $6,282 | Due to management company $6,282 |
When Denver pays, each side clears its due-to or due-from account against cash. Settling monthly or quarterly keeps the balances from building up.
What does the IRS say about fees between related entities?
Section 482 of the tax code lets the IRS allocate income and deductions between businesses under common control. The regulation says its purpose is to make sure taxpayers "clearly reflect income attributable to controlled transactions." The standard it applies is "that of a taxpayer dealing at arm's length with an uncontrolled taxpayer."
For services, 26 CFR 1.482-9 lists the methods for testing the charge. One is the services cost method, which tests certain services by their total cost "with no markup." A service has to meet that section's eligibility rules to use it.
What this means for your group depends on how each entity is owned and taxed. That is why the method needs a CPA's sign-off before the first charge.
What should a management agreement cover?
- Which services the managing entity provides
- How the fee is worked out, with the driver or rate
- When it is invoiced and when it is paid
- How the method can change, and who approves it
A written agreement explains the fee to your CPA, your lenders and anyone who buys a location later.
What goes wrong most often?
- Booking the income in one entity and forgetting the expense in the others.
- Letting due-to and due-from balances grow for years without settling them.
- Changing the rate mid-year without a reason anyone wrote down.
- Charging a location for services it doesn't receive.
See intercompany reconciliation for keeping both sides in step.
General information, not accounting, legal or tax advice.
- 26 CFR 1.482-1, Allocation of income and deductions among taxpayers (Cornell LII)
- 26 CFR 1.482-9, Controlled services transactions (Cornell LII)
- IRS: Limited liability company (LLC)
Every figure on this page was checked against these sources on Oct 6, 2026. General information, not legal or tax advice.