TLDR
Unallowable costs are expenditures that 2 CFR 200 prohibits from federal award charges — including alcohol, entertainment, lobbying, and bad debt. They must still be tracked and segregated in your accounting system. Excluding them from the books entirely creates its own audit finding.
Unallowable costs are expenditures that 2 CFR 200 Subpart E explicitly prohibits from federal award charges. They include alcohol, entertainment, lobbying, bad debt, charitable contributions to third parties, and fundraising costs, among others. The compliance obligation that surprises most organizations: unallowable costs must still be tracked and segregated in the accounting system — not omitted from the books.
How it works
The cost principles in 2 CFR 200 Subpart E (sections 200.420–200.475) govern what may be charged to a federal award. Most costs are subject to a four-part test — necessary and reasonable, allocable, consistently applied, and not otherwise prohibited. But certain categories are prohibited outright, regardless of whether they are reasonable or beneficial to the program.
The major categories of unallowable costs include:
- Alcoholic beverages (200.423) — prohibited in virtually all circumstances
- Bad debt (200.426) — including uncollectible receivables and related costs
- Charitable contributions and donations (200.434) — contributions to other organizations
- Entertainment (200.438) — including meals, recreation, and amusement costs not directly program-related
- Fines, penalties, and mischarges (200.441) — costs from regulatory violations or contract disputes
- Fundraising and investment management (200.442) — costs of raising funds from external sources
- Goods or services for personal use (200.445) — any cost primarily serving employees’ personal benefit
- Lobbying (200.450) — costs of influencing legislation, regulation, or administrative decisions
- Certain legal costs (200.435) — including costs of contesting federal findings
The 2 CFR 200.405 requirement is frequently overlooked: unallowable costs must be identified, segregated in the accounting system, and clearly documented. An organization that simply omits unallowable costs from its books — rather than recording them in a separate non-federal account — creates an internal control finding because auditors cannot verify segregation that does not exist.
When it applies
Unallowable cost rules apply to every organization that receives federal awards, including subrecipients that receive pass-through funding from state agencies or universities. The prohibition extends to costs charged to federal awards and — critically — to costs included in the indirect cost rate base.
Including unallowable costs in the indirect cost pool inflates the rate calculation. Even if the unallowable costs were never directly charged to a specific award, their presence in the pool overstates the approved rate and produces an audit finding.
Common misconceptions
Unallowable does not mean unrecorded. This is the most common misunderstanding. An organization that hosts a board dinner, knows it is unallowable, and records the cost in a general operating account without federal-award coding has met the requirement. An organization that does not record it at all — because “we never charge that to grants” — has created an internal control weakness.
Entertainment is almost never allowable. Organizations frequently argue that meals at a conference or a recognition dinner are “program-related.” The bar is very high: the cost must directly and identifiably benefit the program, not merely happen in proximity to it.
Lobbying prohibition extends to indirect advocacy. Time spent by staff contacting legislators, preparing testimony, or coordinating with advocacy coalitions is unallowable — including when the employee is funded partly by federal awards and not separately tracking that time.
Some costs are conditionally unallowable. Legal costs, for example, are sometimes allowable and sometimes not, depending on whether they relate to a federal program dispute, a non-federal matter, or a civil or criminal proceeding. The conditional nature of these items requires category-level analysis, not a blanket rule.
Related terms
- Allowable costs — costs that meet the four-part test under 2 CFR 200 and are not otherwise prohibited.
- Questioned costs — what unallowable costs charged to a federal award become when flagged in a single audit.
- Cost segregation — the accounting practice of recording unallowable costs in separate accounts for verification purposes.
- Indirect cost pool — where unallowable costs must not appear; their presence inflates the rate calculation.
- Matching funds — unallowable costs also cannot count as match or cost share contributions.
How GrantPipe handles unallowable costs
GrantPipe maintains a configurable list of account codes flagged as unallowable under 2 CFR 200. When a transaction is posted to a flagged account, the system records it in the appropriate non-federal cost center and excludes it from indirect cost pool calculations. The audit trail shows the segregation clearly: unallowable costs appear in a distinct section of the grant compliance dashboard so Finance Directors can confirm, before an audit, that nothing prohibited reached a federal award account.
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Source: Office of Management and Budget, 2 CFR Part 200 Subpart E
- Allowable cost
- A cost that meets all four tests under 2 CFR 200: necessary and reasonable for program performance, allocable to the award, consistent with applicable cost principles, and consistently treated in the organization's accounting.
DEFINITION
- Cost segregation
- The accounting practice of recording unallowable costs in separate accounts or cost centers so they are clearly distinguishable from costs charged to federal awards. Required under 2 CFR 200.405.
DEFINITION
- Indirect cost pool
- The pool of shared organizational overhead costs used to calculate an indirect cost rate. Unallowable costs must be excluded from the pool before the rate is calculated.
DEFINITION
- Lobbying (per 2 CFR 200)
- Attempting to influence federal, state, or local legislation, regulation, or administrative decisions. Direct and indirect lobbying costs are unallowable on federal awards per 2 CFR 200.450 and related statutes.
DEFINITION
Q&A
What are unallowable costs under 2 CFR 200?
Expenditure categories explicitly prohibited from federal award charges under 2 CFR 200.420–200.475. They include alcoholic beverages, entertainment, lobbying, bad debt, charitable contributions to third parties, fundraising, fines, and certain advertising costs.
Q&A
Do unallowable costs have to be tracked?
Yes. Unallowable costs must be recorded and segregated in the accounting system — not omitted. Auditors must be able to verify that they were excluded from federal charges and from the indirect cost rate base.
Q&A
Can unallowable costs be included in an indirect cost rate?
No. Unallowable costs must be excluded from both direct federal charges and from the indirect cost pool used to calculate the indirect cost rate. Including them in the indirect pool inflates the rate and produces an audit finding.
Q&A
What is the difference between unallowable and questioned costs?
Unallowable costs are categorically prohibited by 2 CFR 200 — no documentation or justification makes them allowable. Questioned costs are expenditures flagged by auditors as potentially unallowable, unsupported, or unreasonable; whether they are disallowed depends on agency review.
Q&A
Are entertainment costs always unallowable?
Generally yes. Entertainment costs are unallowable under 2 CFR 200.438 unless they directly and identifiably benefit the program — an extremely high bar. Meals at conferences with documented business purpose may be allowable; staff social events are not.
Frequently asked