Legal Definitions - AOGI

AOGI stands for Adjusted Ordinary Gross Income.

Adjusted Ordinary Gross Income (AOGI) is a specific calculation of a company's income used primarily in U.S. tax law. It helps determine if a corporation meets the definition of a "Personal Holding Company" (PHC), which is subject to a special tax. To arrive at AOGI, you start with a company's "ordinary gross income" – which generally includes most regular business income like sales, services, rent, interest, and dividends, but typically excludes capital gains. From this ordinary gross income, certain specific deductions are then subtracted, such as property taxes, interest expenses, and depreciation directly related to rental income or other passive income sources.

In essence, AOGI provides a refined measure of a company's core, non-capital-gain income after accounting for certain direct expenses, making it a critical figure for classifying corporations for tax purposes.

• Example 1: Real Estate Investment Company

  Imagine "Urban Properties Inc.," a small, family-owned company whose primary business is owning and managing several apartment buildings. Their main source of income is rent collected from tenants. They also incur significant expenses like mortgage interest on the properties, property taxes, and depreciation on the buildings. To calculate Urban Properties Inc.'s AOGI, the tax accountant would take all the rental income and then subtract the specific deductions directly related to those properties, such as the mortgage interest, property taxes, and depreciation. This resulting AOGI figure would then be used to determine if the company's rental income constitutes a high enough percentage of its total income to classify it as a Personal Holding Company.

• Example 2: Small Investment Portfolio Company

  Consider "Growth Fund LLC," a company established by a group of friends to pool their money and invest in publicly traded stocks and bonds. The company's income primarily consists of dividends from stocks and interest from bonds. They also have minor income from a short-term consulting project. When calculating Growth Fund LLC's AOGI, the dividends and interest income would be included, and any specific, allowable deductions directly tied to managing these investments (though often limited for passive income) would be subtracted. The AOGI would then be compared against the company's total income to assess if its passive investment income is substantial enough to trigger Personal Holding Company status.

• Example 3: Manufacturing Business with a Rental Division

  "InnovateTech Corp." is primarily a manufacturing company that produces electronic components. However, it also owns a separate commercial building that it leases out to another business, generating rental income. InnovateTech Corp. pays property taxes and incurs depreciation expenses on this rental property. When calculating InnovateTech Corp.'s AOGI, the income from its manufacturing operations would be included, and the rental income would also be added, but only after subtracting the specific expenses related to the rental property, such as property taxes and depreciation. This adjusted rental income, combined with other ordinary income, forms the AOGI, which helps determine if the company's overall income profile makes it a Personal Holding Company, despite its primary manufacturing business.