Navigating Tax Compliance for Federal Government Contractors
As a federal government contractor, you are accustomed to operating in a complex and highly regulated environment. What you may not appreciate is that something as mundane as tax compliance is as integral a part of your business landscape as the FAR. Tax regulations and reporting requirements unique to the GovCon industry make navigating the tax landscape particularly challenging. In this blog post, our goal is to provide you with an overview of the landscape, key dates, and a comprehensive guide to the documentation you’ll need to have at the ready for planning and to easily meet filing deadlines.
Why is Tax Compliance Sooooo Important for GovCons?
Tax compliance in the realm of federal government contracting is still a “money” thing, but in more ways than for commercial businesses. Tax IDs are used by DLA, filing status is disclosed in SAM, and many contractor disclosures inquire as to the status of filings and open investigations. Tax compliance is recognized as a critical component of maintaining and demonstrating financial stability to the government and teaming partners. The consequences of non-compliance can extend beyond IRS fines and penalties, tax agency-initiated withholds, and cash flow stresses. They can negatively impact your GovCon’s eligibility for future government work. It is incredibly important that you not only meet tax deadlines but do so completely and accurately!
Understanding Your Tax Landscape
Before embarking on your journey with the lofty goal of meeting tax deadlines and fulfilling requirements, it’s imperative to gain a firm grasp on your GovCon’s tax obligations. This basic understanding will help you make informed decisions and provide your best opportunity to optimize tax strategies. This understanding starts with where you do what you do (tax jurisdictions), who does what you do (employees and payroll), and who is actually liable for paying Corporate taxes (you, your GovCon or a combo of the two). Let’s start at the top with “The Feds” and work our way down.
Federal Income Tax: At the heart of your tax responsibilities lies federal income tax. Understanding the impact of certain tax elections and the type of tax entity you have chosen for your business is a great place to start. Are you a solo operator reporting your business on your personal return? Did you incorporate (let’s hope so, but that is a separate conversation)? Did you form an LLC? Did you elect S-Corp status or partnership reporting? Each tax entity type has distinct filing requirement nuances as to payment requirements. Your tax advisor can assist once you arm them with some of these basics: your company’s EIN number; your company’s operating agreement or articles of incorporation; and the latest federal tax filings for your business. Your tax advisor can discuss options with you to help guide you toward the best filing options for you.
Once you understand your Federal return filing requirement the next step is whether you will file on the accrual basis – the same basis on which you keep your company books and records (we hope, otherwise that is yet another conversation) or on the Cash basis. Accrual-based tax filing means you get taxed on net income in the period you earn it and you deduct expenses in the period you become obligated to pay them. Cash-based tax filing means you get taxed on the net of revenue received (i.e. customer deposits into your bank account) and expenses paid (checks written, ACHs processed, credit cards charged, etc.).
Government contracts often involve intricate cost-reimbursement, fixed-price, or time-and-materials contracts, each with its own implications for tax treatment. Contract incentives, awards, or penalties may also impact revenue streams. Understanding the nuances of your contracts and how they translate into revenue for you is as vital to your compliance efforts as knowing whether you file a 1040, a 1065, or an 1120.
Regardless of your chosen tax entity or your basis for filing, understanding the rules that apply to your GovCon business – and some meticulous record keeping – will help ensure you can always check that box that you have filed and paid Federal tax on time.
Payroll Taxes: Compliance with payroll tax regulations is another cornerstone of your tax obligations. Federal government contractors must strictly adhere to income tax, Social Security tax, and Medicare tax withholding and remittance requirements when compensating employees. Take care in determining whether to process payroll in-house or to outsource, and stay current on changes in tax rates, thresholds, or regulations that might affect your payroll tax obligations. The accurate calculation and timely remittance of these taxes are critical to avoid penalties and take care of your business’s most valuable asset – your employees.
State Income, Sales and Use Taxes: The complexity of tax obligations extends beyond federal and payroll tax considerations. Depending on the nature and location of your business activities, you may also find yourself navigating the intricacies of income, sales and/or use tax at the state level. The tax landscape varies from state to state, and the determination of whether you are liable (nexus exists) for these taxes can hinge on factors such as the type of goods or services you provide and where contract performance takes place. The best part of state taxes – the rules change frequently! Keeping clear records is critical. Armed with this information, your tax advisor can help you navigate this portion of your tax journey.
Federal Due Dates and Deadlines – Tax Year 2023
- March 15, 2024: Deadline for S Corporation and Partnership Tax Returns Due (Form 1120S and Form 1065)
- April 15, 2024: Individual and C Corporation Tax Returns Due (Form 1040 and Form 1120)
- June 15, 2024: Second Quarter Estimated Tax Payments Due
- September 15, 2024: Third Quarter Estimated Tax Payments Due
- October 15, 2024: Extended S Corporation and Partnership Tax Return Due
Some states follow the Federal calendar – others do not. Another important reason to keep close track of the factors that impact nexus.
Year-Round Tax Planning
Let’s shine a spotlight on the benefits of tax planning beyond helping to reduce stress as deadlines loom. By investing time during the year, you may spend less total time managing tax compliance and, better yet, lower your overall tax obligation:
Strategic Investing: Timing purchases or sales of investments to optimize capital gains and losses, and favorable tax rates.
Capital Planning: Strategic purchases of equipment and capital improvements, considering deductions, credits, and incentives. The timing and classification of owner distributions.
Estimated Taxes: Assessing obligations and adjusting estimated tax payments to prevent significant over or underpayments.
Staying Current: Tax laws evolve. Staying up to speed on changes that impact your GovCon will only help you plan and adapt.
Reducing Stress: Waiting until the last minute to address tax issues is not only stressful. It can lead to rushed and (often) bad decisions.
What to Keep for Your Tax Advisor:
Must-have documentation:
- Financial Statements – Balance Sheet and Income Statement (Profit and Loss Statement)
- Income Documents – Revenue Records by state, Forms 1099 and W-2
- Expense Documents – Detailed receipts, credit card statements, mileage records
- Payroll Records – Payroll Registers, Quarterly and Year-End Payroll Reports and filings
- Asset and Depreciation Records – Purchase date, amount and descriptions are key
- Previous Tax Returns – Critical if you are changing tax preparer
- Records of Estimated Tax Payments – Proof of payment to include amounts, dates, and payees
- Loan and Lease Agreements
- Bank and Investment Account Statements
By now, we’ve buried you in detail, but we hope you walked away with a better understanding of your tax obligations, learned about the critical Federal tax deadlines for the 2023 tax year, understood the significance of tax planning, and saved the list of important documentation you’ll need to furnish to your tax advisor. Armed with this knowledge, your GovCon is well-equipped to successfully navigate the intricate world of taxation. Stay informed, stay proactive, and stay compliant, my friend – your business depends on it!
About The Author, Aimee Hollenhorst
Aimee Hollenhorst is a CPA with over 30 years of experience providing auditing, consulting and compliance support to Government Contractors. She is a BOOST CFO consultant who before joining BOOST, helped navigate three separate successful acquisition transactions.
