Entertainment gifts meals

Entertainment, Meals, and Gift Expenses – Tax Deductible


                This can be a confusing area for business owners and is often misunderstood.  In an effort to help business owners to plan ahead for the 2014 tax year, the focus will be on entertainment, meals, and gift tax deductible expenses.


Entertainment Expenses

The IRS definition of an entertainment expense,

  • “Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.
  • An ordinary expense is one that is common and accepted in your trade or business.
  • A necessary expense is one that is helpful and appropriate.” (1)

In order for entertainment expenses to be deductible, the entertainment expense must meet one of two qualifying requirements.  Per the IRS, the entertainment expense must meet either the directly related test or the associated test (1).  The direct test requires that the entertainment either takes place in an obvious business setting or the main purpose of the entertainment was to engage in business activity, the business activity was performed, and the prior expectation was that a benefit/income would be received as a result (1).  If the expense does not meet the direct test requirement, the expense still may be deductible if it meets the associated test.  This test requires the expense related to the trade or business and the timing must be directly before or after a “substantial business discussion” (1).  Some entertainment expenses are subject to a 50% limit while others are not (1). 


Check out the chart on the IRS website, http://www.irs.gov/publications/p463/ch02.html.  This website also has examples to help tax payers determine what entertainment expenses qualify.  Be sure to talk to your company’s tax accountant prior to events to ensure your company can take full advantage of tax deductions available for these expenses.




Often meals are considered to be 50% deductible by business owners.  However, this is not always true.  Meals associated with an entertainment expense in which a business owner or an employee from the company attend, are considered a form of entertainment (1).  In these cases, follow the entertainment rules which may not be limited to the 50% limit. (1).  Review the IRS website, http://www.irs.gov/publications/p463/ch02.html#en_US_2013_publink100033880, to determine what items are exempt from the 50% limit.  Prior to events, talk to the company’s tax accountant so your company can take full advantage of meal expense deductions.




Gifts given to an individual whether directly or indirectly are limited to a tax deduction of $25 per gift (2).  The cost of the gift does not include incidental costs (ex. gift wrapping) (2).  Per the IRS, gifts do not include 1) advertisement items that cost $4 or less and 2) have the company’s name permanently engraved/printed and are broadly given out (2).  Review the examples given on the IRS website, http://www.irs.gov/publications/p463/ch03.html, for clarity.  Gifts to employees are also deductible.  These gifts fall under De Minimis Benefits.  Some examples include Holiday gifts, occasional parties, and occasional tickets for theater or sporting events (3).  The De Minimis gift must be considered to have little value (be sure to include frequency in you calculations) and also cannot be a form of cash (3).  For more detail on employee benefits that are deductible review the IRS publication, http://www.irs.gov/publications/p15b/ar02.html#en_US_2014_publink1000193660.



Tax Accountant

These rules are subject to change.  It is important to talk to your company’s tax accountant regularly to avoid missing important tax updates.  If possible talk to your tax accountant prior to large expenses to ensure the company is in line with IRS rules for taking advantage of available tax deductions.  Otherwise, be sure to clear up any questions regarding these tax expenses as they occur. 


The company must be able to support or prove the expenses that are deducted on the tax return (4).  When entering these expenses into the accounting program, make sure the transaction descriptions are detailed and clearly state the purpose of the expense.  Evidence must also be kept on hand should the IRS request proof of deductions.  The IRS defines adequate evidence as showing “the amount, date, place, and essential character of the expense” (4).  Review the IRS recordkeeping website, http://www.irs.gov/publications/p463/ch05.html, to make sure the company’s recordkeeping policies are in compliance with the IRS requirements.


Planning ahead now will help to save time and money at the end of the year when the company’s tax return is being prepared.  Take time now to review the company’s recordkeeping policies and talk to your tax accountant to clarify the treatment of entertainment, meals, and gift expenses.

Works Cited

1. Internal Revenue Service. Entertainment. IRS. [Online] [Cited: 05 13, 2014.] http://www.irs.gov/publications/p463/ch02.html.

2. —. Gifts. IRS. [Online] [Cited: 05 14, 2014.] http://www.irs.gov/publications/p463/ch03.html.

3. Inaternal Revenue Services. Publication 15-B Main Content. IRS. [Online] [Cited: June 6, 2014.] http://www.irs.gov/publications/p15b/ar02.html#en_US_2014_publink1000193660.

4. Internal Revenue Service. Recordkeeping. IRS. [Online] [Cited: May 14, 2014.] http://www.irs.gov/publications/p463/ch05.html.

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8(a) Revenue

Why participation in the 8(a) program may be right for your business…          


The government has many programs to help socially and economically disadvantaged business owners.  One specific area, is called the 8(a) Business Development Program(8(a) Program).  The purpose of the 8(a) Program is to help small businesses to thrive and become competitors in the government contracting world through the use of sole-source contracts (1).  The definition of a sole source contract per FAR 2.101 Definitions, means there is only one source for the contract (2).  In other words there are no competitors for the job.   Participants in the 8(a) revenue program may receive up to $4 million for goods and service contracts and $6.5 million for manufacturing contracts (1).  Another benefit to participating in the 8(a) Program is the ability to join forces with other 8(a) Program companies (1).  This allows the ability to pull resources together to bid on larger prime contracts (1).

                The 8(a) Program is a nine year business development program (1).  The first four years are spent in the developmental stage and the last five years are called the transition stage (1).Until graduation, the participants will be monitored by the Small Business Administration (SBA) through annual reviews, business planning, and systematic evaluations (1).  This is to ensure that each participant is on track to meet the goals required to become competitive in the government contract world.  During this time participants will be provided with specialized training, counseling, marketing assistance, and executive development (1).  Check out the links in this blog and see if this is an option for you and your company.  This just might be the edge your company needs to grow and develop as a competitor in the government contracting world.


Eligibility Requirements

                The SBA has several requirements to qualify for the 8(a) Program.  American citizens, by birth or naturalization (3), must meet the following requirements:


                -Social Disadvantage – The SBA defines socially disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identification as members of groups without regard to their individual qualities” (4).  Certain groups, called presumed groups, are listed on the SBA website (http://www.sba.gov/content/social-disadvantage-eligibility).  Owner(s) who are not a part of a presumed group may be determined to be socially disadvantaged on a case-by-case basis (4).  In these instances the owner(s) must prove a distinguishing feature, personal experience of social disadvantage within the US, and the negative impact resulting from the social disadvantage (4).


                -Economic Disadvantage – After proving social disability, the owner(s) must prove their economic disadvantage (5).  The SBA defines economic disadvantage as “socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities” (5).  The SBA has established economic thresholds for a qualifying individual’s net worth.  An individual’s assets may not exceed $4 million, the average income over three years must be below $250,000, and the net worth cannot be greater than $250,000.  Several other factors listed on the SBA website are reviewed by the SBA to determine whether the owner(s) are economically disadvantaged (http://www.sba.gov/content/economic-disadvantage-eligibility).


                -Ownership – The SBA reviews several factors to determine eligibility for the 8(a) Program.  Some key factors are the owner(s), must own at least 51% of the company and the ownership must be a direct, unconditional ownership (6).  For a complete list and explanation visit the SBA website (http://www.sba.gov/content/ownership-eligibility).  It is important to note after approval for the 8(a) Program, the SBA will continue to monitor the ownership eligibility (6).  Any changes to the ownership or business structure while participating in the 8(a) Program may need to be approved by the SBA prior to implementation (6).


                -Control – The SBA reviews control separately from ownership (7).  Several criteria must be met to prove control.  Some of the requirements are the owner(s) must serve as the highest officer, control the board, make long-term decisions, and run the day-to-day business operations (7).  For a complete list visit the SBA website (http://www.sba.gov/content/control-eligibility).  Just like ownership eligibility, the SBA monitors the control eligibility as long as the company is in the 8(a) Program (7).


                -Size – The company must be a small business as determined by the SBA (8).  The average of a company’s revenue or number of employees over three years is used to determine the size of the company (8).  In the process of determining size eligibility, the SBA also looks at the company’s relationships with other companies and individuals; such as, contractual relationships, prior relationships, family ties, and common investments (8).  After the SBA approves the size eligibility, the SBA monitors the size as long as the company is in the 8(a) Program (8).  In order for the company to remain in the 8(a) Program it must meet the size requirements or the company may be graduated out of the program (8).  To determine whether your company meets the size requirements use the size standard tool provided by the SBA (http://www.sba.gov/tools/size-standards-tool?ms=nid20021).


                -Additional – The SBA requires additional criteria to be met.  The owner(s) must be determined to have good character (9).  To determine whether the owner(s) have good character, the SBA will look for criminal conduct, SBA violations, debarred or suspended firms or persons, and false information submission (9).  It is important to note, any owner who owns more than 10% of the company will be evaluated by the SBA (9).  Also, the SBA only allows a company and owner to participate once in the 8(a) Program (9).  In other words an owner cannot participate again with a different company nor can a company participate again with another owner.


Applying for 8(a) Program

                The SBA provides free guidance for individuals who want to apply for the 8(a) Program.  To contact a local office open the link below.


Free online training courses are also provided by the SBA.




To review the 7 steps the SBA provides for applying for the 8(a) Program, as well as contact information click on the following link.




Works Cited

1. US Small Business Administration. About the 8(a) Business Development Program. SBA.gov U.S. Small Business Adminsitration. [Online] [Cited: August 28, 2013.] http://www.sba.gov/content/about-8a-business-development-program.

2. Federal Acquisition Regulation. Acquisition Central. [Online] [Cited: October 2, 2013.] http://www.acquisition.gov/far/.

3. US Small Business Administration. 8(a) Requirements Overview. SBA.gov U.S. Small Business Administration. [Online] [Cited: March 26, 2014.] http://www.sba.gov/content/8a-requirements-overview.

4. U.S. Small Business Administration. Social Disadvantage Eligibility. SBA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/social-disadvantage-eligibility.

5. —. Economic Disadvantage Eligibility. SBA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/economic-disadvantage-eligibility#.

6. —. Ownership Eligibility. SBA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/ownership-eligibility.

7. —. Control Eligibility. SBA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/control-eligibility.

8. —. Size Eligibility. SBA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/size-eligibility.

9. —. Additional Eligibility Criteria. USA.GOV. [Online] [Cited: September 30, 2013.] http://www.sba.gov/content/additional-eligibility-criteria.

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Financial Accounting

Financial Accounting and types of ownership

According to Dictionary.com, financial accounting is defined as the theory and system of setting up, maintaining, and auditing the books of a firm. Companies and firms rely heavily on accounting data to analyze the continuing growth of the business as well as to make financial decisions for the betterment of the company. Accounting systems of the company depend upon the company size and the requirements of the shareholders. Some companies employ user friendly software such as QuickBooks and others use more complex accounting software such as Peachtree or NetSuite to record their financial data.

Financial Accounting –

Financial statements reflect the image and reputation of the firm. This shows if the company is growing or losing money over time. They help bankers make decisions about lending money, by calculating risk based on the financial analysis and ratios of the current assets and liabilities of the borrowing company. Statements give ease to the shareholders to verify if their investments are safe and help in making decisions about any future involvement with the company. Creditors and suppliers can also refer to financial statements before they decide whether to grant loans or not. 

Management Accounting –

Based on the size of the company, there might be different departments overseeing the performance of the company. Management is well known as a key player of the organization, who runs the company based on the company’s mission, vision, and beliefs. Management accounting helps internal decision makers, such as top executives, department heads, and other people at the management level within the company. It serves as a mode of evaluating employee performance or the need to take necessary steps required for the betterment of the company.

Some of the common questions asked by bankers, lenders, suppliers, and shareholders before they make any decision are:

  • What is the financial situation of the company on any given day?
  • How well did the company do during a given time period?
  • Will the company be able to make loan payment/pay bills on time?
  • Will I get a return on my investment?

Three statements that are very important for decision makers that are prepared by the accountant are:

  • Balance Sheet
  • Income Statement
  • Statement of Cash Flows.

An individual can form different types of corporation or ownership interest based on the need and type of business. Following are the types of corporations or ownerships one can elect:

  • Sole Proprietor – A business with a single owner. In this case the person who is running the business is also liable personally for all the business liabilities.  
  • Partnership – A business operated by two or more individuals who act as co-owners. Liability of business is often guaranteed by all of the owners’ personal net worth.   
  • Corporation – An entity created under state law that has one or more owners who have very limited liability.  

Corporations and limited liability companies can both have board of directors who are responsible for the continuing growth of their businesses. They can further appoint managers who supervise day to day operations in their specific departments and prepare reports as requested by the board of directors. In order to run the company in an effective and efficient way, duties should be distributed and segregated among different individuals. In almost every corporation or LLC, shareholders/members appoint a board of directors who further appoint managers. Among the managers of an entity, Chief Executive Officer is considered to be the top position in the organization.


Privately Owned – A corporation owned by an individual, a group of partners or a small family, in which shares are not publicly sold.


Publicly Owned – A corporation that sells its shares of ownership to the general public.

Accounting standards and auditing regulations have been established to monitor publicly owned as well as privately owned corporations. They are-  

  • GAAP – Generally Accepted Accounting Principles – This term applies to all broad concepts and detailed practices to be followed in preparing and distributing financial statements. It includes all the conventions, rules, and procedures that together comprise accepted accounting practice.  
  • FASB – Financial Accounting Standards Board – The private sector body that is responsible for establishing GAAP in the United States.  
  • SEC – Securities and Exchange Commission – The ultimate government agency charged by the US Congress to implement GAAP on all companies whose shares are traded in general public.  
  • IASB – International Accounting Standards Board – An international body established to develop in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards  
  • AICPA – American Institute of Certified Public Accountants – A Professional association in the private sector that regulates the quality of the public accounting profession.  
  • Sarbanes-Oxley Act – A US Law passed by Congress in 2002 that gave the government a larger role in regulating the auditing profession.


Accounting has become an integral part for the survival of businesses.  Every business needs an accountant to manage their financial needs and to provide accurate information of the business to its shareholders. Based on the needs and requirements of the business, an individual can choose different types of ownership that benefit the company. Different types of ownership can also protect or minimize risk of shareholder’s personal net worth against company’s liability.

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Where Does My QuickBooks Data Go?

Where Does My QuickBooks Data Go?
Do you really know how your QuickBooks data entry processes affect your financial information and reports? QuickBooks transactions are not static images. The correct set up of the customer names, service items, and payroll items drives the movement of the company’s transactions into the financial reports. Would you like to be in the know about where your entries go?

Customer List:  Aged Accounts Receivable and Profit and Loss by Job reports
For every customer in the list, there may be multiple jobs. Time worked by employees and subcontractors, Travel and ODC costs expensed, and customer invoices created, should all be tagged to the specific job. A/R Aging Summary will display by customer name, but a quick mouse click on the balance will bring up the details by job.
Use the Reports menu in the EDIT>Preferences section to determine how your report will calculate the age of an overdue accounts receivable. The terms are selected from a drop down list on the invoice screen.

Tagging the job name for all direct costs will provide detailed data on the Profit and Loss by Job report and roll jobs into a total by customer column.

Service Items List:  Revenue Accounts, Direct/Project Cost Accounts, and Profit and Loss by Item report

Job costing is easy if you remember that direct/project cost activities should always be linked to the service item. While clients usually remember to tag the customer job name when recording transactions, omitting the selection of the service item in favor of recording straight to the ledger account causes invoicing transactions to post incorrectly to an expense account. When recording expenses via a vendor bill, check, or credit card screen, direct/job costs should be placed on the ITEMS tab of those input screens. Indirect and other non-project related costs may be placed on the EXPENSES tab since no customer/job is to be tagged for such things as office supplies or subscriptions.

When invoicing the customer for recovery of allowed direct/project costs, again select the travel, meals, or ODC item from the ITEMS list. The service items have already been set up so they will post as revenue and not as an offset in the direct/project expense accounts.

Use the Item Profitability report as a tool for good internal control. Detail profitability reports can be sorted various ways by job name or memo description and expenses incurred are matched against amounts billed to the customer.

Payroll Items List:  Payroll Summary Reports and Payroll Reconciling
Careful set up of payroll items means more than just coding paychecks into categories of wages or taxes. The coding of item type and tax tracking attributes are needed to segregate taxable compensation, non-taxable additions like expense reimbursements, and voluntary deductions such as medical insurance premiums, tax reducing 401K contributions. Payroll Summary reports should be run by the client every pay cycle and compared to the reported data from the payroll company. Understanding the QuickBooks payroll summary report and the paying attention to item coding errors at the time the payroll is run will go a long way towards the elimination of reconciling problems encountered by your Accountant when preparing documentation for the company financial statements.

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IRS Final Regs on Expensing Property

Final changes which will be effective January 1, 2014, have been made to the IRS’ temporary 2011 de minis expensing (cap policy). Now is the time to begin reading up on how these changes will affect your company (here on called taxpayer).

Here are some changes taxpayers should be aware and discuss with their tax accountant in order to determine whether action is required.

1) Taxpayers need to review the new wording in section 263(a) which describes which expenses may be deducted or must be capitalized. The new wording from the IRS website is as follows;
(a) Any amount paid out for new buildings or permanent improvements or betterments made to increase the value of any property or estate, or
(b) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made”.

2) The minimum capitalization policy on materials and supplies with a useful life of more than 12 months, has been raised to $200 beginning January 1, 2014, which has been increased from $100 per the 2011 temporary regulations.

3) Taxpayers are required to have a written accounting policy for how de minimis safe harbor items will be handled. This policy must be written and implemented by the 1st of the tax year. This means if a taxpayer wants to take advantage of the de minimis rules for the tax year 2014, the policy must be written and implemented by January 1, 2014. Keep in mind, when the safe harbor is elected for a tax year, the IRS requires all items that qualify for the safe harbor be treated the same.

4) Under the 2011 temporary regulations the de minimis safe harbor was limited to a ceiling amount of the greater of 0.1% of gross receipts taxable year or 2% of the total depreciation and amortization expense for the taxable year for taxpayers with an applicable financial statement (i.e. audited). The final regulations eliminate this and amounts properly expensed under the taxpayer’s financial accounting policies are deductible for tax purposes. The advantage of the new ceiling limit is the ability to make de minimis safe harbor decisions at the invoice level instead of the complicated analysis of receipts and total depreciation expenses. The new ceiling limits under the final regulations are either $5,000 invoice or per item purchased as substantiated by an invoice.

5) Taxpayers without an applicable financial statement, but with accounting procedures in place have de minimis safe harbor if the property does not exceed $500 per invoice, or per item as substantiated by an invoice.

6) The de minimis safe harbor election is considered a tax year election in a timely filed tax return.

7) The taxpayer may file for a change in method of accounting if the change may create audit exposure.

8 ) Final regulations permit a qualifying small taxpayer to elect to not apply the improvement rules to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building. Eligible building property includes a building unit of property that is owned or leased by the qualifying taxpayer. If the amount paid for repairs, maintenance, improvements, and similar activities performed on a building unit of property exceeds the safe harbor threshold for a taxable year, then the safe harbor is not applicable to any amounts spent during the taxable year. The safe harbor for building property held by small taxpayers may be elected annually on a building-by-building basis by including a statement on the taxpayer’s timely filed original Federal tax return, including extensions, for the year the costs are incurred for the building.

9) The depreciation life of building improvements was shortened to 10 years

For more details on the changes made to the 2011 temporary regulations, visit the IRS website.

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Federal Contractors DCAA Compliance Checklist

This is the typical process that federal contractors adhere to in order to become and remain compliant with DCAA/DCMA requirements.
1. Complete the Pre-award Survey of Prospective Contractor Accounting System Checklist.
a. This survey is a checklist of the DCAA requirements of contractor’s accounting systems. Be sure to address all no responses.
b. For more information on the requirements found in this survey read page 13 of Information for Contractors.

2. Review the company’s timekeeping policies with DCAA requirements.
a. Guidance can be found on page 16 of the Information for Contractors
b. Visit this link for an overview of what to expect from the DCAA in regards to timekeeping.

3. The Defense Contract Management Agency (DCMA) may evaluate the company to determine the financial risk of the company. The Information for Contractors gives a brief overview on page 12.

4. Review the goals of the company to determine the type of contract that will best suit the company.

5. Submit a price proposal in response to a Request for Proposal (RFP)*
a. Use the format provided by FAR 15.408
b. Evaluate the price proposal before submitting using the following adequacy checklist.

Note: It is important to be able to support the proposed costs of a price proposal, as the contractor is solely responsible for the burden of proof.
http://www.dcaa.mil/DCAAM_7641.90.pdf(page 21)

6. Determine whether Cost Accounting Standards (CAS) will need to be followed.
a. Use the chart on page 36 of the Information for Contractors for guidance on whether CAS is required.
For contract type descriptions review FAR section 16
b. If CAS is required, use FAR part 30 – Cost Accounting Standards Administration as a guide.
c. After submitting a proposal, re-evaluate whether the terms of the contract have changed the evaluation results from above.

7. Submit a Provisional Billing Rate if the contract requires interim reimbursements per FAR 42.704.*
a. The individual responsible for the final indirect cost rate should be the same individual who submits the provisional billing rate
b. Once a provisional billing rate agreement has been received, the rates may be revised by mutual agreement between the contractor and auditor/contracting officer.

8. Claims for reimbursements (invoices submitted to the government) should be submitted as determined by the contract terms.
http://www.dcaa.mil/DCAAM_7641.90.pdf (page 41)

9. Submit the Incurred Cost Proposal
a. Also known as ICE (Incurred Cost Electronically) Model or incurred cost submission
b. Due within 6 months after the close of the contractor’s fiscal year if FAR clause 52.216-7 is in one of your contracts.
http://www.dcaa.mil/DCAAM_7641.90.pdf (page 66)
c. The information submitted in the incurred cost proposal supports the contractor signed Certificate of Final Indirect Costs.
http://www.dcaa.mil/DCAAM_7641.90.pdf (page 66)
d. Keep in touch with your contracting officer to stay on top of the final indirect rate agreement as per FAR 42.705-1.

10. Completion Voucher
a. The voucher needs to be submitted within 120 days after the final indirect rate listed above has been settled per FAR 42.705.
b. An example is provided on page 57 of the Information for Contractors.

*For submitted items without due dates, contact the contracting officer for due dates.

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Senior Executive Compensation Benchmark applicable to all contractor employees effective January 1, 2012

FAR Proposed Rule: Senior Executive Compensation Benchmark applicable to all contractor employees effective January 1, 2012 (certain agencies)

In this proposed rule, DoD, GSA, and NASA are proposing to amend FAR 31.205-6(p) to require that the compensation costs incurred after January 1, 2012, for all contractor employees on all DoD, NASA, and Coast Guard contracts awarded before December 31, 2011, be subject to the senior executive benchmark compensation amount. The reference to 31.205-6(p) in FAR 52.216-7 was updated in the interim rule to reflect the revision in 31.205-6(p). This proposed rule uses the interim rule as its baseline.

Effective June 26, 2013, the interim rule amended FAR 31.205-6(p) to require that the incurred compensation costs for all contractor employees on all DoD, NASA, and Coast Guard contracts awarded on or after December 31, 2011, be subject to the senior executive compensation amount. The reference to 31.205-6(p) in FAR 52.216-7 is also updated to reflect this revision in 31.205-6(p).

With the amendment, companies could potentially have to go back and reclassify 2012 compensation in excess of the benchmark if charged as allowable costs on contracts awarded prior to December 31, 2011.  The rule is not effective for non-DoD, non-NASA, and non-Coast Guard contracts, but that to is not etched in stone.

Comments are due by August 26, 2013. www.regulations.gov, Search FAR-2012-0017-0001.

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Unallowable Costs

Wouldn’t it be nice to bill everything to the government?  Many government contractors incur several expenses but all expenses are not billable to the government. These costs are referred to as unallowable cost. The government will not reimburse them as a part of a federal contract and should be excluded from any billing, claim, or proposal applications. The FAR Cost Principles Guide goes into detail of the many unallowable costs.

Some common unallowable costs are:

Advertising costs

The cost of public relations and advertising that have a primary focus of promoting the contractor’s sale of products and or services are unallowable per FAR (31.2051).  Examples of unallowable advertising fees are:

  • Creating logo pens to give to customers
  • Purchase of cups with the company logo on them distributed to customers
  • Cost of attending a trade show or conventions that has a purpose “other than dissemination of technical information or stimulation of production”, including the cost for the meeting room, display, exhibit, or salary of employees in setting up the demonstrations used in conjunction with the show or special event.
  • Help-wanted advertising cost that does not describe a specific job position per FAR.31.205-34(b)
  • Cost of memberships in civic and community organizations

Legal Fees

Any cost associated with a Federal, State, local, or foreign government for a violation or failure to comply with a law by the contractor are unallowable per FAR 31.205-47 if the results of the case occurred due to a settlement of a proceeding by a third party in the name of the US under the False Claims Act and there is a conviction or finding of contractor liability, or suspension [FAR 31.205-47(b)]. Other legal costs that are unallowable per FAR 31.205-47(f) are cost incurred for defense against government claims or appeals or the prosecution of claims or appeals against the government, defense of antitrust suits, organization, and reorganization or resisting cost are all unallowable.  Some examples of unallowable legal fees include:

  • Legal fees to defend the company against something that is not related to a specific contract
  • Court fees related to the State pressing charges against a contractor due to failure to comply with a regulation
  • Cost the contractor incurred  to appeal claims against the federal government

Organizational Cost

Cost connected with planning or reorganization of the structure of the company, including mergers and acquisitions are unallowable. Also included in the unallowable organizational cost are any fees associated with raising capital (FAR 31.205-27).  Some examples of unallowable organizational cost include:

  • A lawyer filing business regulation paperwork
  • A lawyer performs services to add a new partner
  • Consulting an accountant to strategically plan increasing the company fund

Fines & Penalties

A cost resulting from a violation or failure of the contractor to comply with Federal, State, local or foreign laws and requirements are unallowable per FAR 31.205-15.  Cost associated with or related to mischarging cost on government contracts are also unallowable. For example:

  • Fines from taxes being paid late
  • Fees associated with a company incorrectly charging a government contract

Patent Cost

Any patent costs that are associated with a patent that is not required by the contract per FAR 31.205-30 are unallowable. However, costs for general counseling related to patent matters such as advice on patent laws and regulations are allowable. Examples of unallowable patent cost include:

  • Cost for a partner to sit with a lawyer to discuss the process of a patent on an item that is not included in a contract
  • Fee  associated with filing for a patent that is not required by the contract


Cost associated with an employee’s sale of a home, costs occurring to acquire a home in a new location, and continuing mortgage principal payment on a residence being sold  in order for an employee to relocate are unallowable per FAR 31.205-35.  As is generally the case, if the relocation costs are related to a specific contract, the FAR guide will need to be referenced as some of these costs become allowable under the contract.  Examples of unallowable relocation costs include:

  • Company paying for an employee’s spouse or dependent who are not employees of the contractor to receive job counseling or job placement.
  • Company paying the employee’s cost of litigation to acquire the new home


The cost of federal income tax, deferred taxes, and taxes associated with refinancing, reorganizing, or refunding the organization are unallowable. Special taxes on land that represent capital improvements are also unallowable per FAR 31.205-41.  Refunded taxes, interest or penalties allowed as a contract costs must be refunded to the Government.  Some examples of unallowable taxes are;

  • Real property taxes for property used for work other than government contracts
  • Deferred state income taxes
  • All federal income tax, paid or deferred
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Contract limitation for WOSB Concerns removed

FAR Interim rule – Contract limitation for Women-Owned Small Business (WOSB) concerns removed

Effective June 21, 2013, DoD, GSA, and NASA issued an interim rule amending the Federal Acquisition Regulation (FAR) to remove the dollar limitation for set-asides to economically disadvantaged women-owned small business concerns (EDWOSB) and to women-owned small business concerns (WOSB) eligible under the Women-owned Small Business Program.  The dollar limit for acquisitions in the manufacturing industries, was $6.5 million or less (including options), and in the case of all other acquisitions, $4 million or less (including options).  This interim rule does not impose new recordkeeping or reporting requirements.

Contract limitations reduced the effectiveness of having a women-owned small business program in that it put a glass-ceiling on the number of eligible contracts available and took the power out of the certification.  Without limitations, the opportunity for larger prime contracts in those industries with an underrepresentation of women-owned small businesses is now improved.  This also creates advantages for teaming opportunities between larger federal contractors and small women-owned businesses.

Comments are due by August 20, 2013.  www.regulations.gov, Search FAR-2013-0010-0001. 

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There are many different types of reports a person can look at to analyze their business. The most important of all financials is the balance sheet.  The balance sheet provides insight of the business’ actual net worth at a specific point in time.  One of the most important parts of the balance sheet is the “Assets”.  There are various kinds of assets an entity can own and use in their daily operations.  The Balance Sheet divides assets into several categories; current assets, long-term investments, fixed assets, intangible assets, and other assets. Notice the separation between current and non-current assets.

Current Assets

A current asset is an asset which is cash or can be converted into cash within 12 months or less.  Cash and cash equivalents, short-term investments, receivables, inventory, and prepaid expense are examples of current assets.

  • Cash and cash equivalents – Cash equivalents are items that can be converted into cash in less than three months.   Money Market funds are an example of a cash equivalent.
  • Short Term Investment – These are investments by the entity which will mature in less than one year. For example, a treasury bond with a maturity of less than one year. Marketable securities and precious commodities are considered short term investments.
  • Accounts Receivables – This is the amount an entity is owed by its customers for the products and services rendered on account with a good faith of receiving the payment in the near future. For example, sales made on account with terms of net 60 days. This means the supplier/manufacturer sold their products or services to its customers allowing them to pay the invoice within 60 days.  A government contractor could have multiple categories of “receivables” related to customers, such as Billed Receivables, Unbilled Receivables, or Retainages.
  •  Inventory – Physical assets within the company to be sold to customers is called inventory. Inventory can range from raw materials to finished goods.  Every company does not have inventory to list on their balance sheet. Some companies only provide professional services to its customers and do not necessarily sell any physical product. Accounting, legal, and consulting are some examples of industries which provide services to its customers and therefore do not have inventory on their balance sheet.
  • Prepaid expenses – Expenses which are paid in advance and amortized over the period of usage or coverage are prepaid expenses. Some products and services require advance payment. For example, insurance may be a prepaid expense. A company buys insurance in advance to protect their assets from unfortunate future incidents. Payments made in advance for the services in near future are listed as prepaid expense on the balance sheet.  As the company uses the services they record expense on the income statement and reduce the prepaid expense. An example of expensing prepaid expense would be if a company had a one year insurance policy for the premium amount of $2,400 per year falling into two consecutive fiscal years with 6 months in each year. At the end of the first fiscal year, $1,200 of prepaid insurance would be expensed to the income statement with the remaining balance of $1,200 recorded in prepaid expense.  Common examples of prepaid expense are insurance, advertising, and rent.
  • Other current assets may include short term Notes Receivable and Employee Advances.

Noncurrent Assets

A noncurrent asset is an asset which cannot be easily dissolved into cash and stays on company’s balance sheet for more than one year. Long-term investments, fixed assets (property, plant and equipment), intangible assets, and other assets terms more than one year are examples of noncurrent assets.

  • Long-term Investments -Investments with a maturity of more than one year and for which management has no intention of using in the daily operation of business are considered to be long term investments. The key difference between short and long term investments is that the short term investments are made with the intention of selling it within the year whereas long term investment may never be sold. Unlike short-term investments which can be more predictable, long term investments come with lot of uncertainty as it is very hard to predict market trends for a future date which could be 5 years from now. Therefore, companies who invest for a long period of time must plan to account for the uncertainty inherent in it. For example, company ABC buy shares of company XYZ, with the purpose of gaining influence or return without capturing the voting rights, the purchase would be listed as a long term investment on ABC’s balance sheet. Another example would be for a bond investor to invest in bonds with a maturity of 10 -20 years.  These would be listed as a long term investment on his/her balance sheet.  Other examples for long term investment are land and buildings not used for the normal operation of business; diversifying investment portfolio with funds such as sinking funds, hedge funds or pension funds to minimize risk and uncertainty.
    • Fixed Assets – Fixed assets often referred to as property, plant, and equipment (PPE), are used for daily operations and held for the long term to earn profits in the company. Land, machinery, equipment, tools, furniture, and software are some examples which fall under fixed assets.  Fixed assets are recorded at their actual cost or fair market value, whichever is lower, and are depreciated over the life of the asset (with exception of land).  Per US GAAP (Generally Accepted Accounting Principles), depreciation methods used in accounting such as straight line, double declining, or sum-of-years digits method must be disclosed in the notes to the financial statements. Accumulated depreciation represents the “used” portion of the fixed assets.  The net of the fixed asset cost and accumulated depreciation is the value of fixed asset at its estimated current fair market value. The amount of fixed assets on company’s balance sheet would depend largely on the type of business. For example, a construction company would have a large amount of fixed assets stored in their machinery; a shipping company would also have a large part of their fixed assets recorded in their fleet such as ships, trucks, planes or administrative buildings across the nation or world; whereas, a consulting or accounting firm would have less fixed assets on their balance sheet as they may need mainly computers and office furniture.
    • Intangible Assets – Assets with the lack of physical substance are called intangible assets. Goodwill is an intangible asset which is recorded during the acquisition of another business. Goodwill represents the excess value paid for the business over the net worth of its assets.  For example, Company A bought Company B for $1 million. The fair value of Company B’s net assets (assets minus liabilities) is $750,000 at the time of purchase. The difference between the amounts paid $1 million and the net worth of Company B $750,000 equals $250,000 which would be recorded as goodwill on the balance sheet of the purchaser, Company A.  A patent is another form of an intangible asset which grants manufacturers and research companies control over the use and sale of a specific design. According to US GAAP, with the exception of goodwill, intangible assets are required to amortize over a period for a lesser of legal life or economic life. For example, Company ABC patented one of its products with a cost of $10,000. The patent has a legal life of 5 years but the company expects to produce it for only 2years and then replace it with an upgraded version.  The company would amortize the patent for 2 years which is shorter of legal life or economic life. Therefore, the amortization would be $5,000 per year ($10,000/2).  Trademarks are another common intangible asset.
    • Noncurrent assets also include security deposits paid, notes receivable for related parties and notes receivable with payment terms longer than one year.

While US GAAP is the basis for this article, the convergence of International Financial Reporting Standards (IFRS) could change in the future, what we now consider as “assets” slightly.

Source Cited:

Needles, B. E. (2012). Principles of Accounting, 12e. Cengage Learning. Retrieved from http://books.google.com/books?hl=en&lr=&id=ayZWY9qHlfcC&oi=fnd&pg=PR3&dq=principles+of+accounting&ots=304y6LWg_R&sig=tnbBcxvt4ZJ88c8RxPkN-Hvvtno#v=onepage&q=principles%20of%20accounting&f=false


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