The holidays are here. Is your company getting ready to have its annual holiday party? If so, you may be asking, “Are the costs of the company holiday party allowable or unallowable?” The answer is maybe.

The Defense Contract Audit Agency, or DCAA, is likely to consider these costs as unallowable based on FAR 31.205-14, Entertainment Costs, which states in part:

“Costs of amusements, diversions, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, transportation and gratuities are unallowable.”

This is a very wide net, which appears to be directed more at marketing and does not mention internal events at all. What can you do to refute this position of unallowability and increase the likelihood of recovery of the holiday party costs incurred?

First, let’s not refer to it or promote it as a “Holiday PARTY”. It may seem to be a minor point, but perception is based on first impressions. If it is a PARTY, it is an amusement, diversion or social activity and unallowable under FAR 31.205-14. Instead refer to it as the annual Employee Appreciation Get-Together or Gathering or Event. These titles infer allowability under FAR 31.205-13, Employee Morale, Health, Welfare, Food Services, and Dormitory Costs and Credits.

You can further strengthen allowability by:

  • Setting aside time for improving employer-employee relations, employee morale and employee performance;
  • Beefing up the event with a short “state of the company” presentation stressing company past successes and future goals; and
  • Identifying employees receiving performance awards and promotions.

Expenses incurred associated directly and indirectly with your holiday gathering may be allowable or unallowable. Here’s a breakdown of the most common expenses, including whether they are allowable or unallowable

Facility Lease or Rental – These costs, assuming they are reasonable for the size of the group and the location, should be considered allowable as a normal business expense.

Entertainment – Costs of a band, DJ, comedian, roving troubadours and the like are unallowable under FAR 31.205-14, Entertainment Costs.

Alcoholic Beverages – Unallowable per FAR 31.205-51, Alcoholic Beverages.

Decorations – Assuming they are reasonable decorations should be considered allowable under FAR 31.205-13.

Souvenirs/Favors – Assuming they are reasonable and not excessive should be considered allowable under FAR 31.205-13.

Appetizers/Meals – If reasonable these costs should be considered allowable under FAR 31.205-13.

Gifts – Gifts are unallowable per FAR 31.205-13(b).

Awards – Awards for performance when paid or accrued under an agreement between the employer and the employee before the services are provided or pursuant to an established plan or policy as defined at FAR 31.205-6(f) or awards made in recognition of employee achievement pursuant to an established plan or policy are allowable per FAR 31.205-13(b).

Costs of Travel and Lodging – If employees (including their spouses) are traveling in from remote, out of area, company locations, their costs of travel, lodging and meals should be considered as a business expense and their allowability established by FAR 31.205-46, Travel Costs for a reasonable period of time before, during and immediately following the event.

Credits – If attending employees are charged an amount to help defer expenses, be sure to credit the amounts received against the expenses incurred when passing them on to the government per the requirements of FAR 31,205-5, Credits.

One final note. It is suggested that all costs incurred be recorded in a separate General Ledger account to facilitate identification and segregation of unallowable costs as required by FAR 31.205-6, Accounting for Unallowable Costs.

Celebrating Is Allowed! The holidays are a time to celebrate your company’s success and the contributions of your employees. It’s also a time to be mindful of staying in compliance with DCAA. Doing so will allow you to enjoy the holiday season while recovering some of the associated expenses. Please contact our firm if you need help. Happy Holidays!