Your application for funding was accepted, and now the government is paying you to do your own job. Well, congratulations! As a small business owner, you must be delighted. But you’ve barely finished celebrating the good news when the government agency with the purse strings, as bureaucratic as any other, reminds you of your obligations. In order to get the money, they say, your accounting system must comply with certain standards. ‘OK’, you say, but the details are a bit confusing. What is this segregation of costs? What exactly is an ‘unallowable’ cost? And, for that matter, which costs are allowable but with restrictions? As a QuickBooks Online user, you must be wondering how to adapt your bookkeeping to these new demands.
R&D is a major factor in the growth and progress of industry and the national economy. However, the expense of carrying on research and development programs is beyond the means of many small-businesses. These small-businesses are thereby placed at a competitive disadvantage.
SBIR as an Alternative Source of Capital
Fortunately, as a small business owner, you may not have to pay out-of-pocket for research and innovation. The US government has a number of programs which fund small businesses for the purposes of R&D. If your business qualifies for funding from one of these sources, you could well on your way towards performing research that you normally wouldn’t be able to afford. These programs exist as both federal and state levels, and some major examples are:
- Small Business Innovative Research (SBIR) programs
- Small Business Technology Transfer (STTR) programs
- Small Business Association (SBA) loans
- National Science Foundation (NSF) funding
Small Business Innovative Research (SBIR)
The federal government allocates billions of dollars each year for extramural R&D, and almost a dozen agencies (of which the Department of Defense is the largest) have over $100 million earmarked for this specific purpose. On average, about $2.5 billion is awarded to small businesses each year, with over half the funds going to firms with less than 25 employees. The SBIR is a major source of funding for small businesses looking for a more level playing field for research.
Accounting Systems Requirements
As mentioned in the opening paragraph, the accounting system of a business must meet certain requirements in order for it to qualify for government funding. Government auditors require accounting records and statements to follow these three standards:
- segregation between direct, indirect and unallowable costs in chart of accounts
- use of job costing and the ability to project and monitor indirect rates
- use of timesheet and labor cost distribution are important
Different types of costs explained
Accounting systems typically don’t require the rigorous categorization demanded by a government auditor. So figuring out which cost goes under which heading may be a little confusing at first. The general guidelines given below should be followed when classifying the numerous costs of running your business:
- Direct Cost: any cost which is identified specifically with a particular contract award as a final cost objective. Direct costs are not limited to items which are incorporated in the end products as material or labor.
- Indirect Cost: broadly defined, indirect costs are those incurred by an organization simply to exist.
- General & Administrative (G&A) Cost: Any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole.
- Unallowable and Allowable with Restrictions Costs:
- certain costs are unallowable and must be separated in an accounting system. These costs include such things as alcohol, entertainment, interest expense, bad debts, contributions and donations, lobbying costs, patent expenses, goodwill, loss on other contracts, and organization costs.
- Allowable with restrictions: compensation for personal services, depreciation, employee welfare, financial costs, patent costs, PR & advertising
Setting up QuickBooks Online for SBIR compliance
- Set up job costing via class tracking
- Set up Chart of Accounts to differentiate direct and indirect costs, if not using class tracking
- Turn on time tracking and payroll allocations
- With time tracking, you can track time worked by your employees and contractors, QuickBooks Online makes it easy for employees to track their time. They fill out simple time-sheets from any computer with an Internet connection. Turn on time tracking from Company Settings → Advanced → Time Tracking
- Fill in weekly timesheet from + (on top of page) → Employees → Weekly Timesheet
- Assign class for recording transactions: Direct and Indirect Expenses and G&A Allowances
- Run reports by class