Q. We are in the middle of a DCAA audit of our 2007 incurred costs and our auditor is questioning Section 179 depreciation deduction costs that we have taken. We have claimed these costs for as long as I have worked here (since 1994) and probably before, and they have never been questioned. In one audit, the auditor intended to question them, but after talking to his supervisor was told that as long as we took the Section 179 deduction on the corporate tax return that it was an allowable expense.

A. If they are challenging it, you probably have an uphill battle.  I checked out DCAA’s guidance - Chapter 7409 - and it states that the first year write-off “would most likely not meet the requirements of CAS 409 and FAR 31.205-11.”  For non-CAS covered contractors, “the FAR limits the depreciation to the amount used for financial accounting purposes.” There are often differences between what the IRS allows and what is acceptable for government costing and the Sect 179 write off is apparently one of those.  Your only defenses may be (1) if you can show you use the same Sect 179 write-off for financial reporting purposes or (2) the actual useful life for the asset(s) in question is one year. The fact they had examined it and allowed it in the past and you had relied on this action to your detriment might provide an equitable estoppel argument but that would likely only be a “frosting on the cake” position if your other arguments are persuasive.

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