SBIR/STTR Compliance Pitfalls

First of all, congratulations on being an SBIR/STTR awardee. We all know that that’s not easy, and it means that your technology is something that has the potential to change the world. At EGC, our goal is to help support you in realizing that potential, and we do this in a few different ways. We love to start working with clients from the very beginning of your journey by identifying opportunities that are aligned with your funding needs.  Since you have already secured SBIR or STTR funding, what else might be out there? We’re very passionate about ensuring that entrepreneurs are able to find those partnerships that enable them to move their technology forward. We also focus on how to position your technology for each specific granting agency. So, if you’ve won your first NIH SBIR, perhaps there’s also potential in the NSF program, or perhaps there’s potential with the DOD CDMRP program, and each of these require a little bit of a different positioning.

What we will focus on today is, once you have these awards, how can you ensure that you’re in compliance with all the requirements? Because once you get your first award, there is a huge rule book that you have to follow now that you are a government funded entity, and we’ll talk through that today.  We’ll also cover how to make sure that you are leveraging the funding that you’re getting to maximize its potential. How are you ensuring that you’re getting as much as you can through the reimbursement process, through negotiating an appropriate indirect rate, through potentially rebudgeting throughout the award period? How do you position yourself if you have a Phase I SBIR to be in as good a situation as possible for receiving your Phase II as well? These are all things that we focus on, because our goal is to help you be successful.

We are very proud of our success here at EGC. I initially founded the company back in 2013 after I had received several SBIR awards as a Principal Investigator myself, knowing what value there would be in having a firm that could support companies throughout that entire process of identifying and managing their award.  We’re thrilled that we’ve been able to help clients secure and manage over $2 billion in funding, a lot of it through the SBIR and STTR programs. We are also thrilled to have worked with over 3,000 clients through all 50 states and 27 different countries, helping to advance their technologies and support their success. Our team includes 70 professionals throughout North Carolina and California. We’re a little bit unusual. We’re all Ph.D.s and CPAs, and so we are at the intersection of finding funding and providing financial management so that you have the financial resources to succeed and advance your technology.

One of the first things that you’re faced with as you receive an SBIR/STTR award – after you celebrate over your Notice of Award – is, what do you do next? You really want to be doing your science. And yet, there is a lot that you have to think about on the accounting side and on the compliance side. And the longer you wait to get things set up, the more you’re going to have to work backwards in the future and redo some things. So it’s best to get set up right from the start. There are a number of different aspects of getting set up right that are important that Jeremy is going to go over in just a moment.

But what are the implications if you try to do things on your own without knowing the rules and regulations? We’ve seen that happen quite a bit. It can definitely get in the way with you being able to successfully complete your project and get your Phase II funding. There’s also a lot of tax implications too. We’ve seen companies come to us a few years into their SBIR awards, where they paid taxes that they didn’t need to be paying. So, there are a lot of different aspects of your SBIR accounting and compliance to consider to help maximize your money.

We’re thrilled to be here today and thrilled to talk through a number of the basics that you’ll need to have in place as you set up your SBIR/STTR award. So happy to hand it over to Jeremy now and look forward to your questions in the Q&A session as well.

Thank you, Eva. Happy to be presenting today and appreciate everyone tuning in. The team of CPAs here at EGC are passionate about helping our clients with all aspects of accounting and compliance. And we find it really special that we get to be a part of something bigger than us. Before we dive in, I want to say congratulations to everyone on securing non-dilutive funding. It’s a tremendous milestone for you and your business, although there’s still plenty of work to be done. The work that you’re doing is important, and I want to say thank you for pushing innovation forward.

For today’s agenda, we’re going to provide an overview of compliance requirements for your SBIR/STTR award. We’re not doing a deep dive, but we want to make sure each of these topics is on your radar and that you have a base level understanding of what goes into the compliance requirements. We’re going to talk about Project Cost Accounting, why it’s important, what is it and what are the outcomes of having a good Project Cost Accounting system.  We’ll also discuss having a timekeeping system. Why is it important? What is the rationale behind why the government is making your salaried employees complete timesheets?  We’ll also discuss the Policies and Procedures manual, which is your “how to” of what you’re doing, how you are putting systems in place to ensure that you’re safe keeping the federal money that you’ve received and ensuring that those controls are in place.  All of that then comes together to ensure that you’re passing any audits that come up with flying colors. And then we’ll continue on to a Q&A session that I’m really looking forward to.

Okay, so let’s start off with, why do compliance requirements exist? Why do we have to go through the painstaking, cumbersome process of ensuring that we’re meeting every SBIR/STTR compliance requirement? It’s quite simple. Millions of taxpayer dollars are being distributed by the government, and these compliance requirements are ensuring that you have systems and procedures in place to avoid fraud, waste and abuse. The government wants to make sure that when they’re providing funding to you for your research and development, it’s being used exactly for what was agreed upon in your in your application. Prior to you receiving funding, you’re going to go through some level of a pre-award review, especially when you’re getting your Phase II.  The granting agency is going to ask questions about the systems that you have in place. What are your controls? What are your Policies and Procedures? How can you make the government more comfortable with giving you this large amount of money and knowing that they can trust you to keep track of it?

If you expend more than a million dollars, you’ll have a Single Audit, and auditors will be focused on both your balance sheet and your compliance requirements, and will make sure that you’ve actually spent the money on what it was intended for. There’s also the potential of an audit by the Office of the Inspector General at any time. They have the right to come in at any time and do a floor check, making sure that you’re filling out your time sheets or asking questions about any other compliance aspect that they want to. One of the more common reviews or audits that we’ve seen is a voucher audit or invoice review.  The government will select one of the invoices you submitted or a drawdown, and they’ll ask for support to substantiate that those costs were indeed spent on what they should have been.

What is a Project Cost Accounting system? It’s a specialized accounting system designed to track and allocate all costs to their primary cost objective. This is foundational for a lot of different compliance requirements. Each cost that you have, you’re going to be putting into a bucket, and that bucket is going to be either direct, indirect or unallowable. Within your direct bucket, the system is going to then disaggregate and keep track of which project each cost is assigned to.

Project Cost Accounting is important for multiple reasons. One, it’s a government requirement that you keep track of each direct cost category separately. Beyond that, you also need to track your commercial costs and your internal R&D separately as well. When you’re processing your drawdowns or invoicing the government, the only way that you’re going to be able to accurately create those invoices or to process those drawdowns is to know with confidence how much you actually spent on directs for that project. And using the Project Cost Accounting system is how you do that. Additionally, you’re going to want to have your commercial sales separately analyzed as well. That way you can see how well your operations are performing. We also work with our clients to have a separate classification for internal R&D, and that becomes incredibly useful during tax time, when our EGC tax accountants are filing the tax returns, they’re able to quickly see what R&D was funded by the company, and what qualifies for the R&D tax credit, which can then be used to reduce income tax liabilities immediately and going forward.

You also have to keep track of your indirect costs separately. That’s important to ensure that you’re not being over-reimbursed for indirects. It’s also important that you have those numbers separately tracked so you can negotiate indirect rates easily. Not having them separately tracked makes it really time consuming to calculate your indirect rate.

You have to keep your unallowable costs separate as well. You have to ensure that you’re not submitting for reimbursement for any unallowable cost. Once you get to the end of the year, and you potentially have a Single Audit, having your Project Cost Accounting system with your costs allocated separately puts you in a position to ease through the audit. It’s very difficult to create your Schedule of Expenditures of Federal Awards (SEFA) without a Project Cost Accounting system.

Directs, indirects and unallowables are the three primary cost categories within your Project Cost Accounting system. If you have multiple grants, you’ll have multiple buckets within directs. The indirect category is one big cost pool, and then your unallowables are a separate cost pool. What you’ll usually see for costs that get allocated to directs – they’re going to be wages, material, supplies, contractors, subawards, all the expenses that as you include in your budget in your application. Your indirects are going to be synonymous with overhead costs, and include utilities, wages for administrative work, paid time off, office space, rent, employee benefits, and general costs that you need to run a business that are not directly allocated to the project that you’re working on. Unallowables are described in FAR Part 31, and many nuances can go into unallowables.  In fact, many nuances can go into each of these cost categories and how they get classified. You can have the same vendor that – depending on what you’re purchasing -could be classified as direct, indirect or unallowable. It’s always the end cost objective that is going to determine what bucket it goes into, not just who vendor is. It is. It’s not as simple as setting up a rule or a process and saying any cost from the vendor goes here. You have to be careful in allocating to each of these buckets depending on what that final cost objective is. For SBIRs, unallowables include travel that costs more than the per diem rate, costs to raise capital, and marketing costs. If it’s a cost that you’re incurring to grow your business, there’s potential that it’s unallowable.

Here is a visual of how all of this culminates into a report. This is a Profit and Loss by Class report generated out of QuickBooks Online – Profit and Loss report being synonymous with an Income Statement. And you can see, we’ve got grant number one, grant number two, commercial, internal R&D, indirects and unallowables. Those are all classes that we’ve set up within QuickBooks to keep track of the directs, the indirects and unallowables separately, and also the individual General Ledger accounts that you’re posting your expenses to. Using a matrix like this makes it easier to then analyze each individual class, each grant by itself, each commercial project by itself, the internal R&D, your indirects and unallowables – and easily spot if something was misclassified. So, for example, if, if you’re looking at the column for grant number one and there are indirect expenses or unallowable expenses, that would be a flag for you that a cost was misclassified, because all indirects should be in the indirect column and all unallowables should be in the unallowable column.

A very easy pitfall to fall into, especially if you don’t have a good Project Cost Accounting system, is called double dipping. For example, a company may have two grants, and they incur an expense for $10,000 and they submit for reimbursement from from grant A, and they get reimbursed.  But they’re not doing a great job of tracking what costs they have, what they’ve been reimbursed for, what grant the costs are applicable to. And so, they forget, then go submit again for reimbursement from grant B. And now they’ve submitted twice for the same reimbursement, and they’ve gotten now $20,000 of reimbursement for only a $10,000 expense. Having a Project Cost Accounting system in place would avoid this – you’d be able to run a Profit and Loss statement by class and reconcile that to what you’ve drawn down, to make sure that what you’ve drawn down matches what you’ve actually incurred, and avoid this scenario of double dipping. As you can see in the third bullet point here, double dipping is something that still happens more frequently than it should, with the Government Accountability Office estimating that in 2022, $445 million worth of awards may have funded duplicative work. So, this is something that happens, and you can make sure that you’re avoiding it by implementing a Project Cost Accounting system.

Indirect rates are another important topic to focus on. Indirect rates are very similar to the overhead required to run your business. And the rate is going to be calculated specific to your agency that you’re working with and each grant. And so you’ll have a different indirect cost basis for different awards, and you’ll want to make sure that when you’re drawing down, you’re able to know that indirect cost basis so you’re doing that calculation correctly. Knowing what your actual indirect cost rate is versus what you’ve been awarded from the government is very helpful for determining if it might be advantageous to negotiate for a higher indirect rate.

How do you make sure that you’re you’re reimbursing for indirects correctly to invoice avoid negligent fraud? First, don’t invoice the government for more than the amount of indirects that you have unlocked through your direct cost spend. So the example here would be, you have $10,000 of direct spend with a 40% indirect rate, meaning that you’ve unlocked $4,000 of indirects – of potential indirects that you can be reimbursed before you have them. If your actual indirect costs for that period were, for example, $6,000, you wouldn’t be able to get reimbursed for that full $6,000. You’d only be eligible to be reimbursed for the $4,000 that you’ve unlocked as part of your direct spend. That $2,000 incremental difference can be still carried forward to future periods if you’re in the same fiscal year, and then, once unlocked by direct spend, can be submitted for reimbursement – but not until you have that direct spend accounted for. The second second thing to be on the lookout for is not invoicing the government for more than the amount of indirects actually spent. So on the inverse side, same example, $10,000 of directs with a 40% indirect rate, you’ve unlocked $4,000 of potential reimbursement for indirects, but you’ve only spent $2,000. You can’t then invoice the government for $4,000 and put that incremental $2,000 difference into your bank account and let it sit there. You can only be reimbursed for what you’ve actually spent. And so having your Project Cost Accounting system and having your indirects separately allocated is how you’re going to avoid both of these scenarios, which unfortunately do happen, and both of these would be audit findings and potential consequences to follow.

All right, shifting to timekeeping. Timekeeping is unique for SBIR/STTR awardees. You’re going to be likely a salaried employee, or have a salaried employee, and they’re still going to have to submit and keep timesheets, and it’s not that they’re keeping timesheets to use as part of your payroll process. Process these timesheets are being used to substantiate wages that were were being reimbursed for as part of that the grant that you’re working on. And the reason that that you’re keeping these timesheets is that, unlike other expenses that the government’s going to reimburse you for, there’s no third party invoice or receipt or any other way of substantiating that this time, these wages, this cost was was actually spent on the grant that you’re working on. And so the way that they do that is through timesheets and making sure that you’re completing your timesheets at least daily, and that you’re signing off on your timesheets, and that your supervisor is signing off on your timesheets as well. A handful of requirements specific to timesheets. You have to fill it out in ink, and you have to have a time stamp. If it’s electronic, they want to make sure that you’re doing it as you’re going through at least daily, ideally throughout the day, and at a minimum of 15 minute increments, you have to record all of your time. It’s not just time that you’re paid for, it’s paid and unpaid time that you’re dedicating to your company. As a startup, you’re trying to manage your finances and how much money you have, and you might be deferring compensation, or you might be working on paid time. You still need to record that unpaid time on your time sheets and use that as part of your total time accounting. You have to once again, sign the time sheets both your the employee and the direct supervisor, and you need to date those signatures as well. Do not back date, do not get to the end of the year and say, oh, I need to shift some reimbursement from this grant to the other grant you need to as you’re actually working on those grants, make sure that you are indeed signing off on timesheets that are accurate and truthful for each of those time periods that you’re being reimbursed For. It goes back then to always the Project Cost Accounting system, and then using that to see how much have I used at this point in time of this grant. And then going forward, do I need to adjust the time that I’m dedicating between these two grants so that I’m using up all the funding for the award that’s going to end sooner to make sure that you’ve got you get full reimbursement for that award, so making sure that you’re timely, doing some planning on the front end to avoid the temptation of Going back and adjusting your timesheets afterwards. The timesheets, coupled with your payroll register, how you’re going to record your salaries and wage expense within your general ledger. Hourly is very straightforward. It’s going to be the hours worked multiplied by the pay rate. Salary becomes more convoluted. You’re going to do total time accounting, which to simplify it is taking all hours work, both paid and unpaid, and using that as your allocation basis for the amount of wages that were paid during that pay period.

So how do we take these systems – the Project Cost Accounting and the timekeeping system – and then put procedures around them to make sure that you’re safe keeping the taxpayer money and that the funds are going where they’re supposed to go? The solution is your Accounting Policies and Procedure Manual. This is going to be specific to your company, and particularly to the size of your company. We help our clients, as they grow, to grow their Policies and Procedures with them. When you’re a brand new company, we take a streamlined approach to developing your Policies and Procedure Manual. You want to focus on, what are the largest risks? What are the associated controls that need to be in place to mitigate those risks as much as possible? And so I’m bullet pointed here some of the focus areas that we ensure clients are set up with to make sure that they can get through their audits – and not just the audits, but have the taxpayer funds that are in their bank account be safely kept. The manual describes your Project Cost Accounting system, which we’ve covered, as well as purchasing and cash disbursement. That’s referring to your accounts payable, your invoices. So as you have an invoice come through, you need to have a process that there is segregation of duties between who’s approving that invoice and then who’s actually clicking the button to pay that invoice, or who’s signing the checks to pay that invoice. You need to have those positions segregated so that there’s not one person that can both approve an invoice and then also pay that invoice. If it is the same person, you’re opening yourself up to potential fraud, where someone could create a fictitious company or a fictitious transaction and then have the funding go to a bank account where it should not be going. Another section of the Manual – debarment – is unique to federally funded companies. It’s referring to a required process for checking vendors to ensure they have not been debarred from doing business with the government. You’re required to do that for any transactions that are greater than $25,000. Another section of the Manual, timekeeping, we’ve covered already. Cash Management is referring to the controls that you need to have in place for invoicing the government, for processing drawdowns. It would note critical points again, on segregation of duty, of who’s preparing the calculation of how much should be drawn down, and then who’s reviewing and actually processing the transaction. Again, these should be separate positions, and what’s very useful for our clients, is that we’re able to assist with preparing the calculation, making sure it’s accurate, and then sending the calculation to the client for their final review, and then we can then go ahead and process the drawdown. And then lastly, the Invention and Disclosure section of your Accounting Policies and Procedure Manual is a government requirement to state how you will handle new IP.

You’ve now got your systems, your processes, your controls, in place, and you make it to the end of the year. You’ve spent more than a million dollars. You’re now going to have the fun of going through a Single Audit. A Single Audit is going to be performed by a public accounting firm. So, you’ll enlist a third party to come in and do the Single Audit for you. A fun way of understanding what a Single Audit is – it’s combining a financial statement audit and a compliance audit into a Single Audit. And so when the auditors are conducting this audit, they’re going to look at both your balance sheet and your financial statements to ensure accuracy there, and then they’re also going to look at your compliance, ensuring that you’ve complied with all government regulations that come with your grant.

In preparing for your Single Audit, the auditors are going to ask for a lot of documentation. They’re going to need to see time sheets, invoices and receipts, employee agreements, contractor agreements, vendor agreements, your Notices of Award, any communication that you’ve had with your Program Officer. I would highlight the communication with Program Officer – if you have anything that changes from your original Notice of Award, your original budget, you need to keep documentation of your Program Officer approving any changes that were made. So make sure that you keep all of these documents on file so that you’re ready when you get to that audit stage. A common audit finding is incorrect cost allocations, and you’ll see a lot of this comes back to your Project Cost Accounting system, so not allocating costs correctly or poor cash management, meaning that you have you’ve drawn down funds too early, not doing your time sheets, not using total time accounting for your labor cost allocations and then submitting for reimbursement of unallowable costs, are all common audit findings.

Jeremy: We not provide audit services. And the reason behind that is there are independence requirements that the AICPA requires. The rationale is that they don’t allow auditors to both prepare financial statements as well as then audit those same financial statements. What we do for our clients is make sure they’re getting through those audits as seamlessly as possible. We’re doing comprehensive accounting—we’re posting journal entries, preparing schedules, and keeping all that documentation we just covered organized and bundled together. So, when our clients are going through these audits, all they have to worry about is signing the engagement letter, and we’ll correspond directly with the auditors to make sure things go smoothly.

Eva: I would definitely encourage you to reach out to us if you are looking for an auditor, because we can do a pre-review of your books, so that by the time they get to the auditor, they’re really clean. And also we have really good relationships with auditors who are comfortable doing audits for SBIR/STTR awardees and have a lot of experience in that space. So don’t hesitate to reach out to us. We’re happy to take a look at your books, assess your readiness for an audit, and also recommend an auditor. And we work hand in hand with auditors.  We’re representing you to your auditor and helping to translate what they’re saying to you, to make sure that you get through the audit as smoothly as possible.

Jeremy: I would suggest talking to an attorney to make sure that you’re crossing your T’s and dotting your I’s on that when it comes to your corporation and employee agreements.  From an accounting standpoint, if you have in your budget, for example, salaries and wages of $100,000, those salaries and wages need to be W2 wages that you’re paying from your company.

Eva: I’m happy to answer this because I’ve worked \very closely with a lot of academic investigators, both as PI myself as well as with many of our clients. First of all, it depends on the agency. So, it would be helpful to know which agency we’re talking about, whether it be NIH, NSF, DOD, but typically, the most important thing that I see in STTRs is whenever you’re going to affiliate an academic investigator, keep them with just one entity. So if you want to affiliate the Academic Investigator with the company, keep them with the company. If you want to affiliate them with the university, keep them with the university. If you are going to affiliate an Academic Investigator with the company, it’s often easiest to do so in a consulting capacity, just because of the issues of trying to run a W2 through the company.  Also, make sure you’re talking to your university. They typically are going to have a Conflict of Interest committee that you’re going to need to run anything by in terms of doing work for an outside entity. Those would be the two things that I say: make sure you aren’t putting the same individual in both the company and subaward budgets. And then secondly, make sure that you are giving plenty of notice to the university, so that you don’t end up in a situation where the investigator isn’t allowed to accept the funding after it’s awarded because of the university policies.

Jeremy: First off, I’m sorry to hear of your circumstances.  That’s terrible to have happen. I highly encourage you to speak with your attorney on what your options might be. It’s tough for me to give more guidance on what next steps would be without more information, but I would contact your attorney and try to identify what potentially caused that termination to occur.

Eva: And I’ll say that, unfortunately, this year we are seeing quite a bit more terminations with less explanation than we have in the past. So you aren’t alone. There are a number of groups and individuals—ourselves included—who are working hard to streamline communication with the granting agencies to better understand the rationale for the termination. If you’ve conducted a drawdown that you haven’t spent, we can certainly guide you in that regard—we’d just need to get some more details from you. We also have strong connections with the NSF, so we can communicate on your behalf if you’re not getting a response from the Program Officer directly, and we’re happy to do that. That would at least help you understand where you’re at and get you some answers to the questions you have. So, we’re happy to do that: happy to communicate on your behalf, happy to take a look at the numbers.  Canceled awards are, unfortunately, something we’re seeing a lot of this year—but we can help you get to the bottom of it.

Jeremy: That’s a great point. We’ve seen a number of canceled awards, especially due to foreign involvement. And we are representing our clients, along with other affiliates, to push for more transparency and especially understanding going forward, so that there everyone knows what the rules are and can comply.

Jeremy: Audits are determined based off of a $1 million threshold of your expenditures, and they’re going to be calculated on the GAAP accrual basis of accounting. So it’s not predicated on whether it’s a Phase I or Phase II.  You could potentially have multiple Phase sI, or you can have a Phase I and a Phase II. If in cumulative, you have more than a million dollars of expenditures, you would be eligible for an audit. And when the auditors conduct the audit, it would be both expenditures from Phase I and Phase II, that would be part of the testing that they do.

Eva: I’ve been in that situation. It’s tricky. There are a number of different things you can do. First, you can buy as much as you can on credit cards, because you can pay those bills later. Depending on the agency – NIH, for example – you can draw funds a few days before a large expense. And so you could potentially draw funds three to four days before you run payroll. You can also secure funds from friends and family or a small seed round, or potentially, there may be state loans or grants available for small businesses. Having a little bit of buffer in your bank account is really, really helpful, just for you to manage the cash flow on a daily basis, so that you’re not every day looking at your bank account and wondering whether or not you can afford a simple expense that you have coming in that day. So if you can get a buffer, any sort of buffer, it’s very, very helpful. Another option is a loan – look into the state programs that are available for loans. Also, talk to your Program Director, there may be some options there as well, if they’re aware of your situation.

Jeremy: The other potentially helpful thing is, if you have supplies as part of your budget, you can look to accelerate the timing of when you purchase those supplies to then unlock some of the indirect spend that you can draw down – as long as you have somewhere to store those supplies until you need them.

Jeremy: It’s going to most likely be a contract if you have a fixed fee, and so there’s likely additional work that you’ve gone through on the front end during the award negotiation process. You’re still going to need to keep track of your costs separately using your Project Cost Accounting system. But those fixed fee agreements or contracts are going to be more focused on what you’re delivering to the government, or what milestones you’re hitting, so more focused on the end results than it being structured as a reimbursement grant.

Eva: One general difference between grants and contracts is that grants tend to give you more flexibility on how you’re spending the money. They tend to be more flexible if your scientific project is going in a different direction. That’s okay, as long as you’ve still got the same overall premise and the problem you’re solving, whereas contracts do tend to be very specific on what the output deliverable is, and so making sure that you are communicating with the with the agency – not only about the financial side of what you’re spending, but also the technical progress – becomes much more important with contracts, because they do want to see you reach those scientific deliverables.

Jeremy: There would not be an audit requirement, meaning that you don’t have to submit an audit report.  However, there’s always the potential that the government – anytime – can step in and ask questions or require you to go through audit procedures. So, yes, almost if you’re less than a million dollars, very unlikely that you’ll have a full audit. If you expend more than a million dollars, you do have to have an audit, and it’s your responsibility to go out and find a public accountant to do that audit. The government agencies not necessarily going to reach out to you and say, hey, you need to go do this, and here’s resources to do it. That responsibility lies with you.

Eva: One thing that I’ll add, that I’ll admit, as a first time investigator I wasn’t aware of, is that when you do get audited, maybe it’s two, three years after you get your first Phase I, the auditors can go back in your books all the way to the beginning of when you received government funding. So it is really important that you get yourself set up correctly, even for your Phase I, because that will be part of the audit. There’s really no way for the auditors to segregate out just that current year, they need to go back in time to when your government funding began.  So, make sure that you’re clean from the start, because those years will be part of the audit, and so will all be subject to being looked at.

Jeremy: To get your award money, you’re going to have to invoice the government. There’s not necessarily a requirement of how frequently you’re to do your drawdowns or your invoicing. Some contracts will have requirements. Generally, business practice is to invoice on a monthly basis, after you close your books for the month. That then gives you the numbers to calculate your invoices and then go ahead and submit them, and get your money in the bank.

Jeremy: If you’re using your grant funding to pay for your research and development, it’s not going to be eligible for the R&D tax credit. However, if you’re using your own company money to fund research and development, there are costs that would be eligible for the R&D tax credit, which is actually pretty lucrative, and you don’t have to wait until you’re cash flow positive or until you’re making money to get those tax credits back. You can use those credits to offset your payroll taxes for the first five years of being a company and so that’s an important piece to know. It’s not as though you’re filing and getting these R&D tax credits and then, well, hopefully we eventually have offsetting revenue as a company. You can go ahead and use the R&D tax credit to have a positive cash flow impact on your company right away. It’s important to have those R&D costs booked separately through your Project Cost Accounting system. It’s a lot easier for our tax team to be able to calculate and file returns if you have a separate class for those internal R&D costs.

Jeremy: Yes, definitely, you have to. You have to keep track of time on each award separately.  That flows into the accounting system for an allocation of your salaries and wages in your payroll costs. Your payroll register will track how much money was paid to that individual, and your timesheet is going to support allocation of the salary, such as does it go to grant number one, or does it go to grant number two? And so you have to have each project separate in your timesheet.

Eva: We are very happy to help you support your Phase II submission. Generally, we ask you to reach out to us right when your Phase I begins, because there’s a lot that you can do throughout the award period of your Phase I project to best position yourself for Phase II success. What is unique about EGC, is that we integrate the science and the finance. And so, we can advise you both on the scientific aspects to make sure that you’ve got your Phase I final scientific report as strong as possible and positioning yourself for Phase II success, as well supporting you on the financial side. So, we can help you with all of those different aspects – scientific and financial – in order to be able to prepare a highly competitive Phase II.

Jeremy: Each agency has different rules for rebudgeting without pre-approval. Even so, we highly encourage, that if you’re going to rebudget at all, just give your Program Officer a call first. Their intent will be focused on ensuring that your scope of work is going to still be completed with a rebudget. Often, rebudgeting indirects to directs is looked on favorably by the POs, because that’s then saying you’re being even more efficient with the federal dollars. You’re getting more work put towards the actual project, rather than overhead costs.

Jeremy: Yes, very much so. That’s the spirit and the intent behind the total time accounting. Any time that you’re spending on your business, you have to record in your timesheet, then that will then be used to allocate your payroll across the different classes within your Project Cost Accounting system.

Jeremy: That’s correct. If you’re being reimbursed by the government for R&D, they’re not going to also give you the R&D tax credit for it. So, the R&D tax credit will be applicable only for costs that you’ve funded through internal company funds.

Jeremy: If you’re incurring more direct costs than what was in your proposal, and if you’re getting toward the tail end of your grant and realizing there’s more work to do, you can re-budget and push costs from indirects to directs. That becomes complicated, because you’re not getting a bigger pool of money, and your direct spend will impact the amount of indirects you’re unlocking for reimbursement. So there’s some nuance there that you’d want to talk to a grant accountant about.  Also, most SBIR/STTR awards—almost all—come with the 7% fee. That 7% fee can be used for anything you want. You can use it for more direct spend, you can use it for more indirects, or—if you wanted to—you could just put it in your pocket and call it a day. Probably not what you’d want to do if you’re looking to keep your innovation going, but that fee can help cover some of those additional direct costs.

Eva: And I’ll just add on that, again, this is agency dependent, but many of the agencies do have supplements available. NIH definitely has supplements available. There are various different supplements through other agencies, such as NSF Phase IIb, for example. I would tell your Program Officer your situation, just in case there’s some supplemental funding available that could help support you, or potentially looking at alternative funding sources. So make sure that you’re keeping close communication with your Program Officer, updating them on your progress. I think that’s really important. And inform them of any additional unforeseen expenses from your original budget. Keep them in the loop, because there may be opportunities to secure additional funding.