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Functional Expense

The IRS and the FASB (Financial Accounting Standards Board) require non-profit corporations to present an analysis of their expenses – by function. That is, how is your organization using its resources? How much of your expenses are spent on “Management” versus “Program?” How much of your resources are used for “Fundraising” rather than “Program?” This type of analysis is required and useful for donors and lenders, but it is also a valuable tool for management.

The presentation of this information is generally in a matrix showing natural expenses such as salaries, occupancy, supplies, travel, etc., allocated to Program(s), Management & General, and Fundraising. In addition to the numerical data, a footnote is required to provide your rationale for the allocation. The rationale for some expenses seems pretty straightforward. For instance, the salary for a Development Director would be allocated to Fundraising. But the salary for the Executive Director might be spread across the various functions based on the average time spent on each activity. Occupancy costs might logically be allocated based on square footage, but repairs might be specific to a certain area based on that area’s general usage.

Your CPA will certainly help with the mechanics of presenting the information, but it is incumbent on management of the organization to provide the rationale for the allocation whether it be a percentage of time spent, square footage, or usage. Illustrating this deeper level of detail as well as the supporting rationale presents the most useful and transparent information to your donors and lenders. It also provides management with important information regarding the use of resources. While the requirement might seem burdensome, the more you know about where and why funds are being expended, the more control you have over the success of your organization. A little preparation will result in better data with which to make your financial decisions. That’s a good thing.

Contact your CPA for further details on how to present your organization’s functional expenses.


Ryan Skuce joined Earney & Company, L.L.P. in 2003, and became a partner in November 2013. He works extensively with physicians, medical practices, and large medical groups. Ryan has experience in accounting and tax services including financial reporting and analysis, technical support, cash flow planning, physician compensation strategies, and medical practice strategic planning. He also has experience in the areas of accounting and tax for a variety of for profit and nonprofit clients. Ryan is currently a member of the American Institute of Certified Public Accountants (AICPA) and the North Carolina Association of Certified Public Accountants (NCACPA). Ryan works with his clients on evaluating operational and technical issues. He provides back-office accounting support, and recommends and assists in the implementation of ideas to cut overhead costs and streamline operations. With an in-depth knowledge of existing and proposed tax laws, Ryan often advises companies on tax deferment or savings through proactive structuring of transactions. He also assists his clients with Internal Revenue Service audits. He received his Masters of Science in Accountancy from UNC-Wilmington and resides in Wilmington, where he enjoys playing hockey with a local team.

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