Common Accounting Mistakes: Government Edition - Issue #8 Unallowable Expenses
There are certain expenses that a business incurs that the federal government does not reimburse. While these costs may be legitimate business expenses, the federal government may disallow a cost which means it cannot be reimbursed using the incurred costs rates calculated to reimburse costs for cost contracts. These costs may be considered unreasonable, or not is support of the government mission. These costs must be recorded in separate general ledger accounts to be easily identified and excluded from any billing. Here are some common examples of unallowed expenses:
Alcohol – the government will not reimburse alcohol even though it is a legitimate business expense for entertainment of potential or current clients.
Bad Debt – both actual and estimated losses from uncollectible accounts receivable including collection costs and legal costs are not allowed.
Bonuses & tuition reimbursement – Both bonuses and tuition reimbursement CAN be allowed under certain circumstances. Guidelines providing metrics for employees to meet as part of an official incentive plan must be included. Many small businesses wait until the end of the year to see if cash is available and provide bonuses based on overall performance of the company for the year and are later surprised when these costs are disallowed.
Fines & Penalties – these costs are meant to deter violations of law or regulation. As such, any fines or penalties resulting from failure to comply with federal, state, local, or foreign laws and regulations is unallowable. This includes penalties for late taxes.
Patent maintenance costs – costs associated with requirements of government contracts or general counsel to secure the patents are allowed. However, maintenance costs associated with a patent already issued is disallowed.
Taxes – federal income and excess profit taxes are disallowed, but state and local taxes including property, franchise, and income taxes are allowed.
DCAA provides an excellent online reference tool, the Selected Area of Cost Guidebook, for contractors and auditors alike to review costs for allowability. Most topics link directly to FAR clauses for further review.
