Watch out! Depreciation may lead to an overstatement of your SBIR indirect rates.
If you’re like most small contractors, you maintain your depreciation in your accounting system in the same manner as what is computed for your business tax return.
Beware: Since your accounting system is to be maintained using generally accepted accounting principles (GAAP), your GAAP depreciation (required for indirect rate calculations) will normally be different than your tax depreciation (which are normally accelerated, making tax depreciation non-compliant for GAAP purposes). In other words, depreciation used for your indirect rates may not be the same depreciation you use for tax purposes.
For example, let’s say you purchase a piece of indirect lab equipment for $10,000 and your company has more than $10,000 of taxable income. For tax purposes, you would want to depreciate the entire $10,000 to minimize your taxable income, which given this threshold, you would be able to do so. However, for indirect rate purposes (GAAP), your depreciation may be limited to anywhere between $1,000 (straight-line depreciation over a 10 year life) or $2,000 (if you use a double-declining balance method of depreciation over the same 10 year life) leading to an over-reporting of your indirect costs by $8,000-$9,000. While you will recover these differences over the 10-year life of the asset, your indirect rate calculations for that year will be incorrect and your rates will be overstated. Direct equipment is not depreciated.
To learn more about depreciation and how they impact your indirect rates, please give us a call or visit www.MokerCPA.com