Every not-for-profit engages in fundraising activities of one kind or another. Whether it’s an employee’s time preparing annual appeal letters or maintaining a donor mailing list, fundraising activities come in all shapes and sizes – and aren’t necessarily always carried out by a team member officially assigned to the task of development. Unfortunately, when these expenses aren’t properly reported, it could mean trouble with the IRS – and with attracting sought-after donors.
With competition heating up for donors, your financial statements can be an asset – or work against you. With greater IRS scrutiny around how fundraising expenses are reported, sophisticated donors are becoming increasingly aware of how to interpret non-profit financial reporting. Thorough, accurate reporting is the expectation among the educated donors you want to attract.
So how can you determine how to best report your allocation of expenses? Here are some tips:
If you have contribution revenue, you have fundraising expenses.
A 2012 Scripps Howard News Service report based on a review of 2008-2010 Form 990’s noted that 37,987 not-for-profits raised over $1 million in contributions, but reported $0 in fundraising expenses. Logic would suggest that someone or something helped these organizations generate contributions.
Employees’ time spent at local events connecting with potential donors, grant writing activities and the development of fundraising materials are just a few examples of tasks considered to be fundraising activities, and any costs associated with those activities should be reported as fundraising expenses.
Fundraising expenses can be both direct and indirect.
Many not-for-profit organizations make the critical error of believing they don’t perform formal fundraising activities because there is no specific person with a development or fundraising job description employed by the organization. As noted, any employee within the organization can, and likely does, perform fundraising activities for the organization, particularly if there is no one employed in a development capacity.
Indirect costs, such as salaries and benefits for program or management and general employees that participate in a fundraising capacity and occupancy costs for those employees can all be indirectly allocated to fundraising expense. Direct expenses, such as postage and printing costs for annual appeals and special event costs, are usually more easily identifiable and should be tracked and recorded as appropriate.
There is no one right way to allocate costs.
Accounting guidance does not specify a required method to allocate costs among program, management and general, and fundraising. The only requirement with the selected allocation method is that it be reasonable, consistently applied, updated for any changes in the overall activities of the organization, and documented. Employee time studies, square footage allocations, actual usage tracking, and percentage of direct costs are all acceptable methods of allocation if based on documented, reasonable assumptions and judgments.
Need guidance on your fundraising expense reporting? RKL can help. Our Not-for-Profit Industry Group is dedicated to helping community benefit organizations tackle challenges and seize opportunities. To learn more, contact Douglas L. Berman, Partner, at (717) 843-3804.
Contributed by Wayne E. Groff, CPA, a manager in RKL’s Audit Services Group. Wayne specializes in serving the audit and accounting needs of closely-held businesses, manufacturing operations and not-for-profit organizations.