Year-end tax planning is not just for individuals. For government contractors, it is a crucial step in managing complex cost structures, optimizing indirect rates, and maintaining compliance with Federal Acquisition Regulation (FAR) requirements. By taking a proactive approach now, contractors can minimize surprises, improve cash flow, and start the new year on solid financial footing.
Review Your Indirect Cost Structure
Government contractors must closely track how indirect costs are allocated across projects. FAR outlines the importance of establishing accurate billing and final indirect cost rates. Reviewing your cost pools and allocation bases before year-end helps identify discrepancies and ensures rates are reasonable and well supported. Contractors with a Negotiated Indirect Cost Rate Agreement (NICRA) should confirm that all supporting documentation is current and complete. Addressing these areas early allows for smoother rate negotiations and reduces the risk of audit adjustments later.
Separate Allowable and Unallowable Expenses
Under FAR, expenses must be reasonable, allocable, and consistently applied to be considered allowable. Costs related to entertainment, lobbying, or certain penalties are explicitly unallowable and should be excluded from both direct billing and indirect cost pools. Reviewing expense classifications before closing the books can help prevent noncompliance and improve audit readiness. A properly designed chart of accounts and regular oversight from your accounting team are key to maintaining accuracy.
Prepare for Rate Negotiations and Compliance Reviews
The end of the year is also a good time to prepare for upcoming rate negotiations or incurred cost submissions. Review your general ledger and trial balance to ensure indirect costs are properly documented, and variances are explained. Strong documentation and consistent treatment of costs help contractors defend their rates and build credibility with contracting officers and auditors.
Final Thoughts
Effective year-end planning is more than maximizing deductions. It is about aligning tax strategy with contract compliance, managing indirect rates, and positioning your business for long-term success. Taking these steps now helps government contractors avoid unexpected rate adjustments, audit issues, or cash flow challenges in the year ahead.
At YHB, we understand the unique financial and compliance challenges faced by government contractors. Our team helps firms build sound cost accounting systems, optimize indirect rates, and develop year-end tax strategies that align with business and regulatory goals. Contact YHB today to start your year-end planning and set your GovCon firm up for success in 2026.
