(Editor’s Note. Recent cases focusing on allowability and allocability of various taxes have made accounting treatment of taxes for contract costing purposes a hot issue. We have used the most recent editions of various texts including Mathew Bender’s Accounting for Government Contracts, prior articles in the GCA REPORT addressing new developments and DCAA’s Contract Audit Manual (DCAM).

The following taxes are unallowable contract costs in accordance with FAR 31.205-41(b):

Federal income and excess profits taxes.

taxes related to financing, refinancing, refunding operations or reorganizations.

taxes for which exemptions are directly or indirectly available. These are exemptions available not to the contractor but to the federal government. For example, a contractor might claim an indirect tax exemption for property owned by the government but in contractor’s possession even though the federal government is exempt from state and local taxes even if in the contractor’s possession. However, if the CO determines obtaining an exemption is too great an administrative burden, the tax is allowable.

special tax assessments on land to pay for capital improvements.

taxes on real and personal property not used in connection with government contracts.

taxes related to funding deficiencies and prohibited transactions under deferred compensation plans.

tax accruals to recognize the difference between taxable income and pretax income recognized in the financial statements.

Generally, taxes not declared unallowable by the FAR are allowable if recorded in accordance with generally accepted accounting principles (GAAP).

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