FORM 990 COST ALLOCATION
Allocating costs between program services and supporting services on the Form 990 is one major issue facing many not-for-profit organizations.
In assessing a not-for-profit organization, donors often scrutinize the ratio of supporting service expenses very carefully – as do charity rating agencies (the efficiency ratios). Accordingly, non-profit managers feel pressure to show the best ratios possible. Also in the mix are tax preparers with limited non-profit experience who often do not appreciate the importance of these ratios and do not always scrutinize them with great care.
So how do you do it? How do you come up with an allocation that reflects a fair distribution of costs and complies with the rules?
Our approach is to first determine what costs are management and general and what costs are fundraising. If an expense is not one of these then it is a program expense. The instructions to Form 990 (pages 41-42) give a good list of items of cost that are management and general (administrative) and/or fundraising costs. These rules very closely match those found in generally accepted accounting principles (GAAP).
Administrative costs include: salary and benefits of the executive director (not for time spent supervising programs), expenses for accounting staff, audit, board of director expense, investment management expenses and a share of overhead costs (e.g. rent)
Fundraising costs include: fundraising personnel salaries and benefits, grant writing, solicitations expenses and a share of overhead costs. Please note that the direct costs of special fundraising events should be netted against special event revenue on page 9, Line 8 of Form 990.
We frequently find obvious errors in the Form 990 cost allocation we examine. For example, accounting and audit fees are often allocated in error to program services. If this allocation is noted it indicates that the allocation did not undergo much scrutiny – whether by the non-profit or the tax preparer – and calls into question the entire allocation itself.
The proper allocation of program and supporting service costs for a non-profit are critical to the management and fundraising efforts of the organization. Make sure you get it done right.