Entering a government contract with federal agencies may require that you or your accounting department abide by additional accounting rules. These guidelines, which will affect your government contract bookkeeping and tax planning, have been designed to make government contracts transparent and promote the best interests of taxpayers.
Get a Clear Understanding of What the Government Requires for Contractors
If you or your CPA embark on contracting with the United States government with the belief that government accounting varies only slightly from commercial business accounting, you all may be in for a shock when you all learn about the government's voluminous and fluctuating accounting requirements.
The Financial Accounting Standards Board (FASB) requires government contractors to comply with
· Cost Accounting Standards
· Federal Acquisition Regulations (FAR)
· FAR Agency Supplements
For example, the federal government limits compensation executives can receive to what it considers “reasonable.” The government considers anything above the ceiling “unallowable.” Your government contractor bookkeeping cannot reflect executive pay exceeding the limit, nor can your business recover amounts exceeding this limit under the contract.
Government Contractors may Experience Surprise Audits
Government contract accounting is usually under extreme scrutiny. Your government contract CPA may need to operate under the assumption that your accounts can be subjected to a government audit without notice. Here at Fusion CPA, we generally recommend that your CPA maintains a condition of preparedness, to help ensure that your company will receive a positive evaluation.
If the government tags your government contract accounting for noncompliance, you may face a time-consuming and arduous process to regain the government's acceptance. Current contracts could be terminated, future business prospects could be lost, and payments on existing contracts could be withheld until the government sees satisfactory improvements in egregious cases of noncompliance.
Selecting the Correct Accounting Method for Government Contract Tax Planning
The accounting method you select may have a large impact on how much income tax you pay as a government contractor. Some government contractors may erroneously believe that the accounting method they use for financial reporting is also what’s used for their income tax reporting, but this is not necessarily the case.
As an example, service-related companies may choose to use the cash method of accounting in their government contract tax planning. With this method, income will not be reported until it’s collected. However, expenses cannot be deducted until they are paid for, with some minor exceptions.
The benefit of the cash method is that taxes can be deferred from one period to the next. Traditionally, it is not a long-term saving. However, when income tax rates change, the cash method of accounting should give you the ability to lower your income one year if you are on the verge of breaking into a higher tax bracket and defer that to the next year when your income rate may be lower.
This usually can be done by either deferring billing, so invoices aren’t paid before the year-end, or prepaying expenses for the next year before December 31 of the current year. Prepayments could include group insurance, subcontractors, rent, mortgage, etc.
Insightful and Professional Advice from Government Contract Financial Advisers
Moderating tax liability and optimizing profits can be difficult in the highly competitive landscape of government contracts. Federal, local, and state taxes are complex, and some government contractors must also deal with foreign tax regulations. Fusion CPA offers government contract CFO advisory services designed to help you address tax planning and compliance needs. Our CPAs have an in-depth knowledge of the government contracting business landscape as it relates to finance and business management. We offer to assist with compliance, analysis, income taxes, and other specialized tax services. Our experienced team of government contract accountants is ready to help. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.