The Defense Contract Audit Agency issued guidance on new allowability rule changes to FAR 31.205-35, Relocation costs issued in the June 27th Federal Register and then issued supplemental guidance on how to compute so-called tax grossup expenses. The initial guidance states the new rules affect contracts awarded on or after July 29, 2002 and provides a chart on the status of the rules before and after the rule change date. Specifically,
1. House hunting and temporary lodging (FAR 31.205-35(a)(2)). Before the change, allowable costs are limited to a maximum of 60 days for the employee and 45 days for spouses and dependents where the change allows all such costs with no time limits if they are reasonable per FAR 31.201-3.
2. Payments for increased income on FICA and income taxes (commonly called “tax grossups”). These costs were unallowable before the change (FAR 31.205-35(c)(4)) and allowable after the change (FAR 31.205-35(a)(10).
3. Payments for spouse employment assistance. These costs were unallowable per FAR 31.205-35(c)(5) and are now allowable per FAR 31.205-35(a)(11).
4. Lump sum reimbursement of miscellaneous expenses per FAR 31.205-35(a)(5) and (b)(4). Before the change they were limited to $1,000 and after the change are limited to $5,000.
The guidance states when auditors are evaluating claimed relocation costs, they must ensure the correct version of the Federal Acquisition Regulation is used. The date the contractor incurs the costs do not determine which version of FAR 31.205-35 is applicable but rather which version of the FAR is in place on the contract date. In other words, the changed costs are “expressly unallowable” on contracts awarded prior to July 29, 2002. The guidance also reminds auditors that penalties apply to “expressly unallowable” costs (MRD-02-PAC-059(R)).
DCAA issued supplemental guidance sixteen days later on the proper calculation of tax grossup payments to employees. It states a common method for computing the tax grossup is:
Tax Gross x (Where x = employee’s marginal Up Factor = 1.0- x tax rate)
For example, assume the employee’s marginal tax rate is 28% and the non-deductible moving expenses are $50,000. A company would commonly compute the tax-grossup as:
The guidance reminds auditors (and contractors, for that matter) that simply increasing the employee’s $50,000 payment by 28% (i.e. $14,000) will not make the employee whole since it must be sufficient to not only pay for the additional tax on the taxable relocation expenses but also on all amounts paid to the employee to reimburse them for the additional employee taxes (MRD-02-PAC-064(R).
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