Tag Archives: expenses

Indirect Cost Series: Part Five – Additional Considerations

This is part five of a five-part series on indirect costs.

As we wrap up our series on indirect costs, it’s important to remember the key takeaways from parts one through four:

  • Indirect costs are costs that are directly attributed as construction costs but are not easily identifiable to specific contracts.
  • Indirect costs must be allocated in a systematic, rational, and consistent way by accumulating them into cost pools, then allocating based on cost drivers that have a strong relationship with the incurrence of costs.
  • Project bids should include estimated allocated costs to maximize contract price, which, in turn, will maximize profit.
  • Accurate budgeting must include the proper allocation of indirect costs in the budgeted amounts to accurately project revenue, costs and profit for each period.

In addition to the above points, the following items should be considered when evaluating indirect costs:

  • Tax Considerations – Generally Accepted Accounting Principles (GAAP) and the Internal Revenue Code (IRC) share similar treatments of indirect costs . The difference arises with the definition of indirect costs. The IRC has a bright line test that specifically notes what comprises indirect costs, whereby GAAP is governed by the Financial Accounting Standards Board’s (FASB) codification of what an indirect cost is.
  • Incorrect Allocation of Indirect Costs – If indirect costs are not properly allocated to jobs and charged to general and administrative expenses, the following items will occur:
    • Estimated contract costs and costs incurred will be understated, leading to an inflated gross margin on the project.
    • General and administrative expenses will be overstated.
    • Indirect costs will be under applied causing management reporting to not be accurate.
  • Federal Acquisition Regulations (FAR) & Cost Accounting Standards (CAS)  Considerations – If you are working on a federal contract governed by FAR or CAS, there are multiple rules regarding allowable and unallowable indirect costs and indirect cost rates that may apply to your construction business . Unallowable costs are often legitimate costs incurred by your business; however, they are costs related to doing business that the government will not reimburse you for as part of your contract (e.g., penalties, interest, meals and entertainment, and certain legal costs). You are not alone; many contractors doing business with the government incur these costs and are subject to these regulations and cannot include any unallowable costs in their billing, proposal or claim to the government . In doing so, you could be assessed penalties and fines. The regulations are rather lengthy and can be complex. Compliance is a must and you need to be sure that you have the right accounting system and practices in place.

Though considering indirect costs in your construction contracts may seem like a no-brainer, these costs can be overlooked since they may be related to all projects but not easily allocated to just one.    A concerted effort should be made to accurately estimate, allocate, and track these costs on a job-by-job basis to ensure accurate financial reporting, budgeting, and to remain in compliance with GAAP and other standards (FAR, CAS, etc.) that could be applicable to your construction business.

For more information regarding indirect costs and construction contracts, please contract Chris Fischer of Aronson’s Construction Real Estate Group at 301.231.6200.

New Health Savings Account (HSA) Deduction Limits Released for 2015

health-savings-account-hsaThe IRS recently released the 2015 annual deduction limits for a health savings account. These limits are typically adjusted each year for inflation.

The 2015 limits are $3,350 for an individual with self-only coverage and $6,650 for an individual with family coverage. Such deductible contributions can only be made to an HSA that is maintained in conjunction with a high-deductible health plan.

A high-deductible plan is defined as

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Tax Tip: Tax Debt and the ‘Alter Ego’

In a recent Court of Appeals case (Berkshire Bank vs. Town of Ludlow MA and IRS, 1/11/2013) the Court ruled that an LLC owned by individual behind on his taxes was that individual’s alter ego. That is, the LLC and the individual were deemed to be one and the same, resulting in the assets of the LLC being available to satisfy the IRS tax debt.

Closely held businesses are in particular in danger of being seen as the alter ego of its owners. Common elements the IRS can use to find an alter ego relationship exists include

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Tax Tip: Home Office Deduction Safe Harbor

In a newly issued Revenue Procedure 2013-13, effective for tax years starting on or after 1/1/2013, the IRS has created a safe harbor for the home office deduction calculation. The safe harbor is $5 times the home office square footage, for a maximum of $1,500. The safe harbor is in lieu of the substantiation of actual expenses otherwise required under IRC 280A.

If the safe harbor is used:

• The safe harbor is the total deduction. No depreciation or any other costs can be taken in addition to the safe harbor amount.
• The taxpayer can take 100% of the mortgage interest and property taxes as an itemized deduction on schedule A. No reduction of these expenses are required.
• Disallowed home office expenses that were carried over from prior years cannot be used in the year the safe harbor is taken. These amounts continue to be carried over and are usable in a year in which actual (substantiated) expenses are claimed.
• The taxpayer can elect safe harbor or substantiated expenses year-by-year.

To expense or not to expense – that is the question.

Capitalization or repair expense?  IRS issues field memorandum to agents.

In December 2011, the IRS issued temporary regulations that offer guidance on capitalizing or expensing costs incurred in the acquisition, production, or improvement of tangible property.  Recently, the IRS’ Large Business and International (LB&I) Division issued a memorandum to field agents concerning their examination of whether such costs have been properly treated

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