Allowability of Meals and Entertainment
As a government contractor, understanding the allowability of meals and entertainment is imperative to your business. You can recuperate costs from the government if they are allowable. How do you know though, which costs are allowable? The Federal Acquisition Regulations (FAR) 31.201-2 outlines standards for determining allowability. This section specifies that for costs to be allowable they must comply with all the following requirements:
- Reasonableness in nature and cost
- Must follow the generally accepted accounting principles
- Must be within limitations specifically defined in the particular contract or agreement
Meal and Entertainment Costs
Meal and entertainment costs can be tricky. First, you need to determine if the costs are allowable or unallowable. Then, you must classify the costs correctly in the general ledger. Some common meal and entertainment costs are business meals, team building, and social events.
Allowable business meal costs relate to the overall day to day operations of a business (General & Administrative) or are allocable to a project (Overhead). Examples of allowable business meals are:
- Lunch for board of directors to discuss new office locations (G&A)
- Dinner to discuss new project support for Project XYZ (Overhead)
Business meals can include both allowable and unallowable costs. Imagine you are out to dinner to discuss new project support and decide to order a bottle of wine with dinner. What costs are allowable and what are not? The meals are allowable, but alcoholic beverages are always unallowable. (FAR 31.205-51).
Team building costs are allowable if they improve employee working conditions, employee relations, morale and performance and be reasonable. Employee recreation costs are allowable only if participation is designed to improve employee loyalty, teamwork, or physical fitness. (FAR 31.205-13). Examples of allowable team building costs are:
- Company baseball tournament organized to promote team spirit and shared experience where the employees participate.
- Birthday cakes purchased to celebrate of all May birthdays of employees.
Entertainment & Social Events
Entertainment and social events are unallowable. This includes costs for “…amusement diversions, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.” (FAR 31.205-14). Costs that are deductible for tax purposes are not always allowable costs. Examples of unallowable entertainment and social event costs are:
- Purchasing Washington Nationals baseball tickets for employees
- The annual Christmas party
Determining the allowability of costs can be difficult, but it does not have to be. Cheryl Jefferson & Associates is available to assist you with allowability of costs, and other aspects of government contract compliance.
Originally written by Ann G., February 14, 2010
Updated and additional content provided by Elizabeth Partlow