How to categorize nonprofit expenses?
Nonprofit expenses are costs incurred to support an organization’s mission, operations, and fundraising efforts. They must be categorized by function and nature to meet compliance requirements.
What is a nonprofit expense?
Nonprofit expenses are expenditures related to carrying out charitable, educational, religious, or other mission-driven activities. Unlike for-profit businesses, nonprofits are required to classify expenses based on functional purpose, what the expense supports, rather than only by type. This ensures transparency, accountability, and compliance with IRS and donor reporting standards.
How to categorize nonprofit expenses
- Record expenses by function: Program Services, Management and General, or Fundraising.
- Also track expenses by nature (such as salaries, rent, supplies, or professional fees).
- Use consistent categories aligned with IRS Form 990 requirements.
- Allocate shared costs (like rent or utilities) across functions using a reasonable method.
- Document allocation methodologies and apply them consistently each period.
Examples of nonprofit expense categories
- Program services: Program staff compensation, program supplies, direct assistance or grants, and mission-related travel or training.
- Management and general: Administrative salaries, office rent and utilities, insurance, and legal, audit, or accounting fees.
- Fundraising: Fundraising events, donor communications and marketing, grant writing or fundraising consultants, and donation processing fees.
Tax implications for nonprofit expenses
- Proper categorization is required for IRS Form 990 and other regulatory filings.
- Misclassification may raise compliance concerns or donor scrutiny.
- Nonprofits must show that a substantial portion of expenses supports program services.
- Clear expense reporting supports grant eligibility.
- Maintain detailed records, receipts, and allocation support for audits and reporting.
