FAQtoids

Below is a list of most frequently asked questions. If you don't find your answer below, please contact us.

 

How do I separate my commercial and government direct costs in my accounting system?
What is the difference between a provisional and actual indirect rate?
What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?
What is an adequate accounting system?
My indirect rate agreement expired with NIH. Why haven't they negotiated a new agreement?
What is the difference between my payroll and labor distribution?
Why hasn't my accountant told me about the Research Tax Credit?
Will the Research Tax Credit get in trouble with the Government and be a violation of the FAR?
Will I have to show classified material to take advantage of the Research Tax Credit?
If I claim the Research Tax Credit, will I get audited?

 

How do I separate my commercial and government direct costs in my accounting system?

You don't. For the most part, direct costs are direct costs whether or not such costs are for direct or commercial activities. Some agencies are different where IR&D costs are included as direct costs (NIH), while other agencies allow you to include IR&D in indirect costs provided that these costs are allowable, allocable and reasonable. Your chart of accounts does not have to delineate between commercial and government, in terms of direct costs, although you should track costs by respective customer and customer type within your accounting system since you are required to maintain your direct costs by contract or grant. If you have further questions, please visit our partners at www.sbirbusiness.com.

 

What is the difference between a provisional and actual indirect rate?

A provisional rate is a temporary rate that allows you to be reimbursed by the government based on a multiplier of a direct cost or costs depending on your indirect rate structure. However, for flexibly-priced contracts (such as cost-plus-fixed-fee contracts – CPFF), you need to file an actual rate proposal within six-months of your year-end to “settle up” between your provisional and actual indirect rates. Any financial requirements occur after the award has completed its period of performance and the actual indirect rates for the years included in the period of performance have been audited. If you are owed money, the government will reimburse you any amounts owed up to the award amount. If you owe the government funding, you would need to write a check for the excess.

 

What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?

A fixed price contract is a contract based on the awardee performing certain milestones or deliverables and being a paid amount for each milestone or deliverable. Fixed price contracts are not tied to cost, but rather action as required under the contract. Therefore, all cost justification occurs during the proposal/awarding phase of your federal award. Cost-plus-fixed-fee contracts are reimbursable types of contracts where your company is reimbursed for direct costs, plus an indirect cost percentage reimbursement depending on your indirect rate structure, plus a profit percentage (also known as fee).

 

What is an adequate accounting system?

While this depends on the agency and auditor, an adequate accounting system is typically a system that has centralized data, contemporaneous transactional processing, adequate segregation of duties, ability to track costs by direct, indirect (by cost pool and base) and unallowable costs, and track direct costs by federal award or commercial activity (job costing). While there are awardees who maintain their accounting system on a decentralized basis such as an accounting system supported by numerous external documents (such as Excel®), and some agencies or auditors may determine this to be adequate, such a system increases the likelihood of errors in accounting and the risk of under/overcharging the government. For a centralized accounting system, click on [Quickstart] to assist you.

 

My indirect rate agreement expired with NIH. Why haven’t they negotiated a new agreement?

This depends on the awardee and their indirect rate history and relationship with NIH. NIH will typically negotiate indirect rates with awardees that have a pending award and an expired rate agreement to the extent that the requested provisional rates exceed NIH’s safe harbor rates. NIH will normally initiate this activity, but at times, may accept your expired provisional rates temporarily until new rates are in place. You can also request that NIH audit your rates and negotiate provisional rates, which is solely up to NIH in terms of agreeing.

 

What is the difference between my payroll service and labor distribution?

Your payroll service merely computes your gross pay, withholds and may or may not expedite taxes and tax return filings, and deducts net pay, employee and employer payroll taxes and other fees from your bank account. Your payroll services are only related to labor distribution for “gross payroll” only. Your labor distribution system takes the gross payroll and distributes the gross pay to each labor category by direct (by contract), indirect (by indirect cost pool) and unallowable categories for purposes of reimbursement. Labor distribution does not have anything to do with payroll taxes, tax return filings, or deductions from your bank account.

 

Why hasn't my accountant told me about the Research Tax Credit?

The Research Tax Credit is an engineering/contractual issue – not an accounting issue. This is a specialty within an engineering specialty. It is highly unlikely that your accounting firm has the engineering staff and expertise to handle this.

 

Will the Research Tax Credit get in trouble with the Government and be a violation of the FAR?

The Research Tax Credit melds very well with the FAR. The categories in the FAR are used to develop the credit. In fact, FAR guidelines are useful in quantifying time for this credit. Many FAR clauses regarding warranties and intellectual property are extremely helpful regarding the credit.

 

Will I have to show classified material to take advantage of the Research Tax Credit?

It is not necessary for the Research Tax Credit team to see any classified materials. The IRS handles confidential and classified issues very well. In the extremely unlikely situation that the IRS needs to see classified material, they have personnel with security clearance who can get involved.

 

If I claim the Research Tax Credit, will I get audited?

If the IRS looks at the credit claim, the vast majority of the time they restrict their examination to only Research Tax Credit issues. The IRS, Hull & Knarr and most of the accounting industry, let their engineers handle the examination.