SBIR/STTR Accounting & Compliance Essentials

Welcome to today’s webinar on SBIR/STTR accounting and compliance essentials. This session is led by Aron Josefsberg, MBA, EGC’s Director of Accounting and Compliance, who brings extensive experience helping companies win and manage SBIR awards. We’re especially glad to share these insights now, given the long-awaited reauthorization of the SBIR/STTR program. 

For those who aren’t yet familiar with us: EGC’s team includes more than 20 Ph.D. scientific grants experts and 15 CPAs and accountants, all specializing in supporting science-centric companies. Together, we’ve helped raise and manage over $2 billion in funding for more than 3,300 clients across the U.S. and internationally. 

A couple of quick notes before we dive in. This recording will be available on our website within a few days, and we’ll send the link by email to everyone who registered. We’ll also be monitoring the Q&A box throughout the presentation, so please post questions as they come to you — we’ll address as many as we can live, and we’re happy to follow up by email on anything we don’t get to. If you’d like a follow-up, please include your name with your question, since we can’t respond to anonymous submissions. You’re always welcome to reach out to us at info@evagarland.com or visit our website to book a strategy session. 

With that, I’ll turn it over to Aron.

Thank you, Katherine. I have 20 years of accounting and financial management experience, including nearly 10 years working alongside Eva on grant accounting specifically. My background covers SBIR/STTR accounting, grant compliance, and financial management, and I focus on supporting small businesses and technology-driven organizations with federal funding compliance and lifecycle management. 

Today, we’ll cover the project cost accounting system, timekeeping, policies and procedures, the audit process, and close with a Q&A session.

Compliance requirements exist first and foremost to ensure that taxpayer funds are being spent efficiently and for their intended purpose, and to help the government avoid fraud, waste, and abuse. The government oversees compliance in several ways: through direct communication with award recipients, pre-award reviews (such as the Just-in-Time process, which evaluates whether your accounting setup can manage an award efficiently), single audits and program-specific audits, potential review by the Office of Inspector General, and voucher or invoice audits. 

As I tell clients often: once you receive an SBIR/STTR award, you go from being one of the least regulated companies to one of the most regulated. Building a compliant grant accounting system from the start is essential.

Project cost accounting is a specialized accounting system designed to track and allocate all costs to their primary cost objective. It matters because it satisfies Cost Accounting Standards (CAS), allows you to maintain a detailed tracking system across direct costs, internal R&D, commercial costs, and indirect/unallowable costs, and enables you to accurately invoice the government, plan future spend, and generate a Schedule of Expenditures of Federal Awards (SEFA) for audit purposes. 

There are three primary cost categories: 

• • Allowable direct costs — costs tied specifically to a cost objective, such as wages, materials, supplies, contractors, and university subawards. 
  • Allowable indirect costs — costs necessary to operate the business but not tied to a specific project, such as utilities, administrative wages, office rent, and employee benefits (fringe). 
  • Unallowable costs — costs the government will not fund under your grant, including alcohol, travel above per diem rates, and fundraising-related costs (including associated legal fees). Unallowable doesn’t mean you can’t incur these costs — you still need to track them for tax purposes — it simply means they’re not reimbursable through your award. 

A Profit and Loss by Class report (also called a project cost ledger) is a useful way to visualize this: separate classes for each grant, internal R&D, indirects, and unallowables, each tracking its own income and expenses. 

Maintaining this system also protects you against “double dipping” — being reimbursed twice for the same expense across separate grants. A 2022 Government Accountability Office review estimated that $445 million in awards may have funded duplicate work, underscoring how important this safeguard is.

Indirect rates cover costs that support the business as a whole, such as lab space rent and wages for staff not directly billing to a grant. The rate is calculated using a defined base, and your specific rate is typically listed at the bottom of your Notice of Award. Depending on your industry and cost structure, it may be worth negotiating for a higher rate than the standard de minimis rate (commonly 10%) if your actual indirect costs run higher. 

To avoid negligent fraud, two rules apply: 

1. Don’t invoice for more indirects than you’ve “unlocked” through direct cost spend. For example, with $10,000 in direct costs and a 40% indirect rate, you’ve unlocked $4,000 in indirects — even if your actual indirect spend that month is higher, you can only draw what you’ve unlocked. 
2. Don’t invoice for more indirects than you’ve actually spent. If you’ve unlocked $4,000 but only spent $2,000, you can only draw $2,000. 

Timekeeping substantiates wages claimed as reimbursable. Unlike other costs, which can be verified by third-party documentation, wages can only be verified internally — which makes timekeeping a higher-risk, more heavily scrutinized area in audits. In my experience, it’s also the most common pain point for small businesses, but it’s essential to get right. 

A compliant timekeeping policy requires that timesheets: 

• • Be completed in ink or through an approved electronic system 
  • Be filled out daily and reflect the full day’s activity 
  • Record all time, whether paid or unpaid 
  • Be signed and dated by both the employee and direct supervisor, with signature dates after the time period ends (no backdating) 
  • Have any corrections crossed out and initialed, never erased 

For hourly employees, wages are allocated by multiplying hours worked by the hourly rate. For salaried employees, wages are allocated on a pro rata basis according to time spent on each project and on general administration — a method known as total time accounting. Your policies and procedures manual should also document expected hours worked per day, consistent with your budget justification. 

A compliant accounting policies and procedures manual should address: 

• • Cost tracking and allowability — how costs and invoices are tracked 
  • Purchasing and cash disbursement — who approves purchases and who disburses funds 
  • Debarment — a required check (for any vendor payment expected to exceed $25,000 in a year) confirming the vendor hasn’t been debarred from federal work 
  • Delegation and signing authority — who reviews and signs off on invoices and purchases 
  • Timekeeping — your documented approach to timekeeping, whatever system you use 
  • Cash management — who pays bills, receives funds, and maintains the books 
  • Invention disclosure and reporting — your policy for reporting new IP, typically required annually through eRA Commons and as part of award closeout

A single audit is required when an awardee expends $1 million or more in federal funds within a fiscal year (note: based on the fiscal year, not the award period). A single audit combines a financial statement audit and a compliance audit, assessing both how funds were spent and whether spending complied with applicable rules, your own policies, and the compliance supplement issued by the Office of Management and Budget (OMB). 

The single best piece of audit preparation advice: document everything, and keep it organized and accessible — whether in Dropbox, Smartsheet, or physical files. Auditors will look for signed timesheets, invoices, receipts, employee and contractor agreements, vendor agreements, subaward agreements, your Notice of Award, and all program officer communications. 

The most common audit findings include: 

• • Incorrect cost allocations (e.g., classifying indirect costs as direct) 
  • Cash management issues, such as drawing funds before they’re earned (most direct funds must be disbursed within roughly 72 hours of drawdown) 
  • Timekeeping deficiencies, such as unsigned or incomplete timesheets 
  • Labor cost misallocations 
  • Submitting unallowable costs for reimbursement 

Make sure your tax advisor is familiar with your entity structure (LLC, corporation, disregarded entity, partnership, S corp), since this determines your filing requirements. Other key considerations include R&D tax credit eligibility (note that R&D costs funded by a grant are not eligible, while internally funded R&D may be), Section 1202 qualified small business stock treatment, and Section 174 R&D cost deductibility. 

One especially time-sensitive note from this session: Section 174, which previously required R&D costs to be capitalized over five years rather than expensed, was reinstated retroactively to 2022. Companies that capitalized R&D costs in 2022–2024 may be able to amend prior returns and claim refunds — but the window to do so closes July 4. We encourage any impacted company to talk with their tax advisor or reach out to our tax team promptly.

Aron: It depends on the awarding agency. For NIH SBIR/STTR awards, you generally have flexibility to rebudget up to about 25% across direct cost categories (excluding subawards and PI salary). NSF is more conservative, typically around 5–10%. For DOD, I’d recommend getting program officer approval before making any changes — they tend to be the most stringent. In general, I lean conservative: if there’s any doubt, get written approval from your program officer. It doesn’t hurt to ask, and you’ll often get a quick “go ahead” in response.

Aron: No — moving funds between direct and indirect requires program officer approval. That’s not something you can do without sign-off, and you may need a new Notice of Award reflecting the change.

Aron: First, make sure timesheets are being done correctly going forward — that’s the most important step. For past issues, don’t attempt to correct timesheets unilaterally, since that can raise red flags during an audit. Instead, reach out to your grants management specialist to explain the issue and agree on how to correct it. In my experience, agencies are generally receptive when you’re proactive and transparent about identifying and fixing the issue. 

Aron: The company is not responsible for tracking this time, but contractors and consultants should track their own time and submit a monthly invoice based on their contractor agreement, which should lay out scope of work and pay structure (hourly or fixed). The invoice should clearly show hours worked and amount billed. Internal timekeeping requirements apply only to your own employees.

Aron: Costs are recognized when incurred, not necessarily when paid — for example, an unpaid invoice from a subawardee or unpaid payroll still counts as an incurred cost. Once costs are tallied for the month, you can draw down the corresponding direct costs, plus indirects (based on your indirect rate) and fee (typically around 7%) on that amount. For example, $10,000 in direct costs with a 40% indirect rate unlocks $4,000 in indirects, plus roughly $1,800 in fee — for a total draw of about $17,000, which you’d then use to pay outstanding invoices and payroll. If a large invoice arrives mid-month and needs immediate payment, a “pre-draw” can be processed, provided it’s reconciled with month-end totals.

Aron: Most agencies allow a 90-day look-back period. If your award starts July 1, for example, you can generally go back and capture eligible costs incurred since around April, provided they were incurred in anticipation of the award. Many companies begin timekeeping and tracking costs early for this reason. At the close of an award, agencies typically allow up to 120 days to draw remaining funds for costs already incurred (not to incur new costs) — useful for situations like university subawardee invoices that arrive after the award period ends.

Aron: I recommend never disposing of these records. I’ve personally seen audits go back as far as ten years. The IRS standard of seven years applies to tax documents specifically, but federal award audits aren’t bound by that same limit, so it’s safest to retain everything indefinitely.

Aron: Licensing fees needed to obtain or maintain the award are generally allowable as an indirect cost. Royalty fees and milestone or success-based payments are typically unallowable.

Aron: These are treated as salaries and wages for grant purposes. We typically set up sub-accounts to flag K-1 partner compensation separately, since it requires different tax treatment, but for grant accounting purposes, it’s tracked under salaries and wages.

Aron: Yes, as long as increases are reasonable — generally in line with standard cost-of-living adjustments. Agencies are unlikely to scrutinize reasonable, modest raises.

Aron: Dues and subscriptions are generally allowable as indirect costs. On some NSF awards specifically, certain subscriptions may be allowable as direct costs if explicitly included in the budget, but for the most part — including standard tools like Microsoft 365 — these are treated as indirect costs of running the business.

Aron: The option typically appears in eRA Commons about 30 days before the award end date, and I recommend initiating it as early as possible if you anticipate needing one. The first no-cost extension (up to 12 months) is generally automatic. A second no-cost extension requires more documentation, including an updated budget justification, and should be started at least three months in advance.

Aron: The threshold is based on direct expenses incurred and indirect funds received within a calendar fiscal year — not the award period. So even if your award started mid-year, the relevant window is January 1 through December 31 of that year, not the 12 months following your award date.

Aron: Yes, health insurance is considered a fringe expense, which falls under indirect costs.

Aron: A program-specific audit applies when your grants fall under the same R&D cluster (noted on your Notice of Award), even across multiple awards from the same agency. Rather than reviewing your entire company’s finances, auditors focus specifically on how the grant funds were managed — reviewing grant income versus spend and sampling timesheets and direct costs tied to that program.

Aron: Common JIT requests include your tax return, a sample chart of accounts, sample financial statements (balance sheet and P&L) for your most recent fiscal year, and a completed Financial Systems Questionnaire. If you receive a pre-award request like this, we’re happy to help you prepare a complete, compliant response.

Aron: Set up a basic accounting system (such as QuickBooks Online) with a chart of accounts in place, even before revenue begins. Be prepared to demonstrate that your company is a going concern — this often takes the form of a simple letter from owners confirming intent to fund operations if needed. Once you receive a pre-award request for financials, our team can help you prepare your initial financial statements.

Aron: Far and away, it’s timekeeping. The most frequent conversation I have with new awardees is some version of, “I can’t get my staff or scientists to fill out a timesheet.” It’s also the area most scrutinized in audits, since it’s the most vulnerable to misrepresentation. Every employee — including owners — needs a signed employee agreement specifying their role and compensation on the grant, paired with accurate, contemporaneous timesheets. The second most common issue is simply not having a proper cost accounting system in place from the start; not every accounting platform supports the project cost accounting required for compliant grant accounting, so it’s important to set this up correctly from day one. And frankly, the third piece of advice is finding the right accountant. Grant accounting is a specialized niche — not every CPA has this expertise, so it’s worth seeking out a team that does.