Some costs cannot be charged to a federal award no matter how the budget is written, how reasonable the amount is, or how genuinely the business needed to spend the money. These are unallowable costs, and the categories come from the federal cost principles rather than from any one agency. Knowing the list before you build a budget saves a round of revision; knowing it before you spend saves a repayment.

The categories that catch small companies

  • Entertainment — amusement, social activities, tickets, and the meals and lodging attached to them. A working meal tied to project business may be treated differently; a team dinner is not.
  • Alcohol — unallowable on its own terms, always, and it does not become allowable by hiding inside a catering invoice.
  • Lobbying — attempting to influence legislation or federal officials, including the cost of a lobbyist retained to help you chase funding.
  • Advertising, marketing, and selling — promotion of the company or its products is unallowable. Narrow exceptions exist for recruitment advertising and for outreach a program specifically requires.
  • Interest — on borrowed capital, with limited exceptions for certain asset financing.
  • Bad debts — write-offs and the collection costs that go with them.
  • Fines and penalties — including settlements for violations of law, and generally the legal costs of defending against them.
  • Contributions and donations — money the company gives away, however worthy.

Patent costs, which surprise people

Founders assume a federal research award will pay to patent what the research produces. Frequently it will not. Many agencies treat the cost of preparing and prosecuting a patent application as unallowable, or allow only narrow items such as the cost of reporting an invention as required by the award terms. Practice varies by agency and by award instrument, and some contracts handle it differently from grants. Assume it is on you unless the solicitation says otherwise, and budget the filing separately using realistic figures from what a US patent actually costs. Ownership of what you invent is a separate question, covered in who owns IP from a federal grant.

The part nobody expects: indirect cost pools

Unallowable costs are not merely uncharged as direct costs. They must also be removed from the pool of expenses you use to compute an indirect cost rate. If your overhead pool includes the holiday party, the trade-show booth, and the interest on a line of credit, your rate is overstated, and every award it touches is overcharged.

The practical fix is bookkeeping, not judgment calls at year end: set up separate accounts for unallowable categories in your chart of accounts from the beginning, so entertainment and marketing never land in the pool in the first place. Companies that skip this and try to scrub the pool retroactively spend far more on their accountant than the discipline would have cost. The same habit makes the reporting described in grant reporting and milestones much less painful, and it keeps you clear of the errors in budget mistakes that sink an application.

This is general information, not accounting or legal advice — your CPA and your agency's grants office decide these questions for your situation. Projects House scopes the engineering work behind federal budgets; the contact form reaches us.