Friday, May 28, 2010

Allowability of Taxes under Government Contracts

The allowability of taxes under Government contracts is regulated by FAR 31.205-41. The cost principle contains listings of allowable and unallowable taxes. Allowable taxes include federal, state, and local taxes (except Federal Income Tax) required to be and are paid or accrued in accordance with GAAP (Generally Accepted Accounting Principles). Fines and penalties are not considered taxes.

Some of the taxes falling under the unallowable cost category include:
  • Federal Income Tax
  • Taxes in connection with financing, refinancing, refunding operations, or reorganizations.
  • Taxes from which exemptions are available directly, or available based on an exemption afforded the Government, except when the contracting officer determines that the administrative burden incident to obtaining the exemption outweighs the corresponding benefits accruing to the Government (State Sales Tax is a good example).
  • When partial exemption from a tax is attributable, taxes charged in excess of that amount resulting from application of the preferential treatment are unallowable.
  • Special assessments on land that represent capital improvements.
  • Taxes (including excises) on real or personal property, or on the value, use, possession or sale thereof, which is not used in connection with Government work. So, if you purchase land as an investment, you cannot claim the property taxes on that land.
Also, see our update on this topic. Click Here.

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