industry alert
December 2, 2013

Government Contracting & Engineering Industry Alert: Year-End News Roundup

Larry G. Silver, Director, Tax Strategies

Updated Per Diem Rates Released

As we noted in our last update, the General Services Administration (GSA) has updated its per diem rates.  For areas that do not have specific rates, you will note that the lodging rates increased from $77 to $83.  The standard rate for meals remained unchanged at $46.

In addition to the above, conference lodging used to allow an additional 25 percent above the established rates; however, with all of the controversies over government conferences, this has been removed.

Additional details can be found on the U.S. General Services Administration’s website here.

Domestic Production Activities Deduction (DPAD)

We have been getting more questions on what engineering services qualify for the DPAD deduction and how it is calculated.  Engineering services that qualify as domestic production gross receipts are defined as:

Engineering services—Engineering services in connection with any construction project include any professional services requiring engineering education, training, and experience and the application of special knowledge of the mathematical, physical, or engineering sciences to those professional services such as consultation, investigation, evaluation, planning, design, or responsible supervision of construction (for the purpose of assuring compliance with plans, specifications, and design) or erection, in connection with any construction project.

The deduction against the federal taxable income is limited to 9 percent of the lesser of qualified production activities income (QPAI) or taxable income for the year. QPAI equals domestic production gross receipts (DPGRs), reduced by cost of goods sold, and other deductions, expenses, and losses allocable to the receipts.

If you have any questions regarding this deduction, please contact Kevin McGinn at kmginn@kmco.com.

Captive Insurance Companies

Captive insurance companies are typically insurance companies that are owned or controlled by the companies’ shareholders or the company itself and the insurance risk may be spread among similar companies. Such arrangements can offer significant advantages to owners/shareholders but present challenges when it relates to cost-reimbursed government contracts.

For government contracting purposes, the allowable expense for the insurance premium paid to a captive insurance company is typically limited to the projected average loss for that period plus allocable administration costs for that period. Such costs are further limited to the amount that the company could have purchased the insurance through a regular insurance provider.

This is one area where the FAR requires you to follow the Cost Accounting Standards (CAS), even though you may not be CAS covered. Section 416 of the CAS, Accounting for insurance costs, stipulates the rules covering these relationships.

National Compensation Matrix for 2013

AASHTO representatives have told us that the updated matrix should be available by February 1, 2014.

IRS Releases New Repair Regulations

If you have an ‘applicable financial statement’ and you have a written de minimus policy in place by the first day of the tax year beginning on or after January 1, 2014, a taxpayer may deduct up to $5,000 per-item as long as the item is treated consistently for book purposes. If you do not have an ‘applicable financial statement’, the limit is reduced to $500.  For a copy of the complete regulation, click here.

An ‘applicable financial statement is (1) a financial statement required to be filed with the SEC; (2) a certified audited financial statement that is accompanied by the report of an independent CPA (or, for a foreign entity, by the report of a similarly qualified independent professional) that is used for credit purposes; reporting to shareholders, partners, or similar persons; or any other substantial nontax purpose; or (3) a financial statement other than a tax return required to be provided to the federal or a state government or any federal or state agency (other than the SEC or theIRS).

This regulation covers many other topics and is fairly lengthy.  If you have any questions regarding the new regulation, please feel free to contact me.

If you have any questions or comments about these topics, please don’t hesitate to reach out to Larry Silver, Director, Tax Strategies, at lsilver@kmco.com or 215-441-4600.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.