31.205-41
Taxes
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.