Allocation – expenses assigned based upon a factual relationship to certain classes of income (i.e. business income, rents, royalties, interest, and dividends).
If an expense is incurred as a result of or incident to or in connection with an activity then, that expense is allocated to the income of that activity to which it is attributable.
If a deduction is definitely related to a class of gross income that includes income in a statutory grouping and the residual grouping….an “apportionment” is required.
Allocation is accomplished by determining, with respect to each deduction, the class of gross income to which the deduction is definitely related and then allocating such deduction to such class of gross income.
Expenses have to be allocated and apportioned to statutory classes of income even if that particular class does not have any income.
An apportionment must be done in a way that reflects to a reasonable extent the factual relationship between a deduction and the grouping of gross income