Understanding Section 174 of the IRS Code: A Guide for Government Contractors

The Single Audit threshold for organizations that receive Federal awards has been increased from $750,000 to $1 million, effective for fiscal periods starting on or after October 1, 2024. This adjustment is designed to streamline audit requirements and is intended to allow federal oversight resources to focus on larger awards. Here is a look at what this change means for organizations and how to prepare. What Is a Single Audit? A Single Audit is an audit of a non-federal entity’s financial statements and federal award expenditures, conducted to ensure that federal funds are used in compliance with relevant laws and regulations. Single Audits must adhere to Generally Accepted Auditing Standards (GAAS), Generally Accepted Government Auditing Standards (GAGAS) issued by the Comptroller General of the United States, and the Uniform Guidance. These audits assess compliance with federal award conditions and verify that organizations follow applicable financial and regulatory requirements. The Uniform Guidance, outlined in Title 2 of the Code of Federal Regulations, Part 200, establishes the standards for recipients of federal funds. It includes rules on cost principles, administrative requirements, and audit obligations to promote consistency in the management of federal awards. The New $1 Million Threshold – WHAT DOES THIS MEAN FOR BUSINESSES? Starting in fiscal years beginning on or after October 1, 2024, only organizations with federal expenditures of $1 million or more in a single fiscal year will be required to undergo a Single Audit. This threshold increase is intended to lessen the audit burden for entities with smaller awards and allocate audit resources toward higher-dollar programs. This change may benefit various organizations, including universities, non-profits, healthcare providers, and smaller government entities, that receive federal funding but typically fall below the $1 million expenditure mark. Key Points to Consider 1. Reduced Audit Burden : Organizations with federal awards under $1 million will no longer need to undergo a Single Audit, which may reduce administrative expenses and allow staff to focus more on their core programs. 2. Focused Oversight : With a higher threshold, federal audit efforts can concentrate on larger awards, where potential compliance risks may be greater. 3. Compliance Responsibility : Even if a Single Audit is not required, entities must still comply with federal requirements for award expenditures and conditions. Internal audits and controls remain essential for ensuring compliance.  4. Preparing for the Change : Organizations with federal expenditures that may vary across fiscal years should monitor their spending closely to determine when a Single Audit is needed. Resources for Navigating Single Audit Requirements While the threshold has increased, maintaining compliance with federal standards remains critical. The following resources provide additional information on Single Audits and compliance under Uniform Guidance: - Council on Governmental Relations (COGR): 2024 Uniform Guidance Readiness www.cogr.edu/sites/default/files/UG%20Readiness%202024_5th%20Look_Final%20Draft_9.17.24.pdf - U.S. Department of Health & Human Services: Office of Inspector General - Single Audit FAQs oig.hhs.gov/compliance/single-audits/frequently-asked-questions-faqs/single-audits-faqs/ The increase in the Single Audit threshold is likely to reduce administrative demands for many organizations. However, maintaining sound internal controls for managing and reporting federal funds remains essential. Preparing now for these changes will help organizations transition smoothly and stay compliant with federal requirements. Consulting with audit professionals or compliance advisors is recommended to ensure internal processes align with the latest federal guidelines. About govIRG govIRG is the government contract specialist with deep expertise across CFO Services, Contracts Management, Accounting, Accounting System Implementations, and Human Resources. Our mission is to provide government contractors with peace of mind by simplifying compliance and increasing business value. With a dedicated team focused on the unique needs of government contractors, govIRG delivers tailored solutions that streamline processes, ensure regulatory compliance, and foster business growth. We are the audit professionals you need. If you have any questions, please contact us.

Government contractors with cost-reimbursable contracts are required to submit provisional billing rates (PBRs) annually. While this may seem like a tedious compliance requirement, it’s actually an exercise that all companies should perform in some form. The insights gained not only help with billing on cost-reimbursable contracts but also offer a deeper understanding of a company’s finances. Developing PBRs is essentially a budgeting exercise that provides indirect rates representing the company’s break-even point. These rates are then used for invoicing on cost-reimbursable contracts in the following year. There are various ways to determine these rates, but the key requirement is that the process be well-documented and the data organized in a clear, intuitive format. Before starting the budgeting process, it’s crucial to ensure your Chart of Accounts (COA) is structured to categorize costs by “objective.” Typically, this structure will divide your COA into sections for recording costs such as Direct, Fringe, Overhead, G&A, and Unallowable. With this setup, you can easily identify and present the necessary details for calculating and submitting your PBRs. The budgeting process itself will vary based on the size, structure, and complexity of your business. The goal is to balance the time and cost of developing the budget with the accuracy of the results. govIRG can help you find the “sweet spot” to deliver an accurate forecast with the right level of effort. Our team can support this process at whatever level is appropriate for your company. Whether you need simple calculations and presentation or a deep dive into the details, we have the expertise to help you efficiently and accurately prepare your annual PBR.  Government contractors operate in a world where compliance is key. While developing PBRs may seem like a compliance obstacle, it’s actually a great opportunity to improve your company’s management. govIRG’s comprehensive approach to compliance management helps contractors avoid cash flow issues, stay compliant with government regulations, and ultimately increase the value of their business.