31.205-41 Taxes
Source: FAR 31.205-41 on acquisition.gov
Only certain taxes are allowable as contract costs, and contractors must follow strict procedures for disputed taxes, exemptions, and refunds to ensure compliance and avoid unallowable charges.
Overview
FAR 31.205-41 outlines the allowability of tax-related costs in government contracts. It specifies which federal, state, and local taxes may be charged as allowable costs, and details exceptions and disallowances. The regulation also addresses procedures for handling disputed taxes, allocation of property taxes, and the treatment of tax refunds or credits. Its purpose is to ensure that only appropriate tax costs are reimbursed by the government, preventing double recovery or improper charges.
Key Rules
- Allowable Taxes
- Federal, state, and local taxes required by law and paid or accrued per GAAP are generally allowable, except as excluded in paragraph (b). The Superfund Environmental Tax is specifically allowable.
- Disputed Taxes
- Taxes under dispute may be allowable if the contractor promptly seeks contracting officer guidance and follows all directions regarding legality or refunds.
- Unallowable Taxes
- Federal income and excess profits taxes, taxes related to financing or reorganizations, taxes from which exemptions are available, special assessments for capital improvements, certain property taxes, excise taxes on benefit plans, income tax accruals for book-tax differences, and taxes under 26 U.S.C. 5000C are unallowable.
- Allocation of Property Taxes
- Property taxes must be allocated to government or non-government work based on use, unless insignificant.
- Refunds and Credits
- Any refunded taxes, interest, or penalties previously allowed as contract costs must be credited or paid to the government. Foreign tax credits reducing U.S. tax liability must also be paid to the U.S. Treasury if the costs were reimbursed by a foreign government.
Responsibilities
- Contracting Officers: Provide instructions on disputed taxes, determine exemption applicability, and direct disposition of refunds or credits.
- Contractors: Accurately identify, allocate, and document allowable and unallowable taxes; seek guidance on disputed taxes; credit or pay refunds and tax credits to the government as required.
- Agencies: Oversee compliance and ensure proper cost allocation and recovery of refunds or credits.
Practical Implications
- This section prevents contractors from charging unallowable or exempt taxes to the government, ensuring cost integrity. Contractors must maintain robust documentation, seek timely guidance on disputed taxes, and properly allocate property taxes. Failure to comply can result in disallowed costs, repayment obligations, or audit findings.
(a) The following types of costs are allowable:
(1) Federal, State, and local taxes (see part 29), except as otherwise provided in paragraph (b) of this section that are required to be and are paid or accrued in accordance with generally accepted accounting principles. Fines and penalties are not considered taxes.
(2) Taxes otherwise allowable under paragraph (a)(1) of this section, but upon which a claim of illegality or erroneous assessment exists; provided the contractor, before paying such taxes-
(i) Promptly requests instructions from the contracting officer concerning such taxes; and
(ii) Takes all action directed by the contracting officer arising out of paragraph (2)(i) of this section or an independent decision of the Government as to the existence of a claim of illegality or erroneous assessment, to-
(A) Determine the legality of the assessment or
(B) Secure a refund of such taxes.
(3) Pursuant to paragraph (a)(2) of this section, the reasonable costs of any action taken by the contractor at the direction or with the concurrence of the contracting officer. Interest or penalties incurred by the contractor for non-payment of any tax at the direction of the contracting officer or by reason of the failure of the contracting officer to ensure timely direction after a prompt request.
(4) The Environmental Tax found at section 59 A of the Internal Revenue Code, also called the "Superfund Tax."
(b) The following types of costs are not allowable:
(1) Federal income and excess profits taxes.
(2) Taxes in connection with financing, refinancing, refunding operations, or reorganizations (see 31.205-20 and 31.205-27).
(3) Taxes from which exemptions are available to the contractor directly, or available to the contractor 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. When partial exemption from a tax is attributable to Government contract activity, taxes charged to such work in excess of that amount resulting from application of the preferential treatment are unallowable. These provisions intend that tax preference attributable to Government contract activity be realized by the Government. The term "exemption" means freedom from taxation in whole or in part and includes a tax abatement or reduction resulting from mode of assessment, method of calculation, or otherwise.
(4) Special assessments on land that represent capital improvements.
(5) Taxes (including excises) on real or personal property, or on the value, use, possession or sale thereof, which is used solely in connection with work other than on Government contracts (see paragraph (c) of this section).
(6) Any excise tax in subtitleD, Chapter 43 of the Internal Revenue Code of 1986, as amended. That chapter includes excise taxes imposed in connection with qualified pension plans, welfare plans, deferred compensation plans, or other similar types of plans.
(7) Income tax accruals designed to account for the tax effects of differences between taxable income and pretax income as reflected by the books of account and financial statements.
(8) Any tax imposed under http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section5000&num=0&edition=prelim" target="_blank">26 U.S.C. 5000 C.
(c) Taxes on property (see paragraph (b)(5) of this section) used solely in connection with either non-Government or Government work should be considered directly applicable to the respective category of work unless the amounts involved are insignificant or comparable results would otherwise be obtained; e.g., taxes on contractor-owned work-in-process which is used solely in connection with non-Government work should be allocated to such work; taxes on contractor-owned work-in-process inventory (and Government-owned work-in-process inventory when taxed) used solely in connection with Government work should be charged to such work. The cost of taxes incurred on property used in both Government and non-Government work shall be apportioned to all such work based upon the use of such property on the respective final cost objectives.
(d) Any taxes, interest, or penalties that were allowed as contract costs and are refunded to the contractor shall be credited or paid to the Government in the manner it directs. If a contractor or subcontractor obtains a foreign tax credit that reduces its U.S. Federal income tax because of the payment of any tax or duty allowed as contract costs, and if those costs were reimbursed by a foreign government, the amount of the reduction shall be paid to the Treasurer of the United States at the time the Federal income tax return is filed. However, any interest actually paid or credited to a contractor incident to a refund of tax, interest, or penalty shall be paid or credited to the Government only to the extent that such interest accrued over the period during which the contractor had been reimbursed by the Government for the taxes, interest, or penalties.