Key takeaways
What this article covers, in order:
- The GAAP requirement: ASU 2016-14
- The three functional columns
- Form 990 Part IX
- Allocating shared costs
- Worked example: a youth literacy nonprofit
- Common mistakes
A statement of functional expenses shows a nonprofit's expenses in a grid: by nature down the side (salaries, rent, supplies, depreciation) and by function across the top (program services, management and general, and fundraising). Under U.S. GAAP, every not-for-profit must present this analysis of expenses by both function and nature in one place, and organizations that file the full IRS Form 990 report a similar grid in Part IX.
This guide explains the GAAP requirement from ASU 2016-14, how Form 990 Part IX works, how to allocate shared costs, and walks through a full example.
The GAAP requirement: ASU 2016-14
Before 2018, only voluntary health and welfare organizations had to present expenses by both nature and function. The FASB's Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, extended that requirement to all not-for-profits. It took effect for annual financial statements for fiscal years beginning after December 15, 2017.
Under the standard:
- One location: the analysis of expenses by nature and function must appear in one place. You can put it on the face of the statement of activities, in a separate statement of functional expenses, or in the notes.
- Allocation disclosure: you must disclose the methods used to allocate costs among program and support functions.
- Function definitions: program services are the activities that carry out your mission; supporting activities are management and general, fundraising, and membership development where relevant.
Most organizations that are audited choose a separate statement, because it is easiest for readers and mirrors the Form 990 layout.
The three functional columns
Program services
Activities that further your exempt purpose: running the literacy classes, operating the food pantry, delivering the counselling. The IRS instructions also place costs of securing a grant or contract to perform a specific program service here.
Management and general
Overall operations and management: board meetings, general legal services, accounting and audit, general liability insurance, office management, human resources and other centralised services, and the annual report. The executive director's time belongs here except to the extent they directly supervise programs or fundraising.
Fundraising
Costs of soliciting contributions, gifts and grants: campaigns, donor mailings, fundraising staff, and soliciting grants from foundations or governments. Direct costs of fundraising events are reported separately on Form 990 Part VIII, line 8b, rather than in Part IX.
Form 990 Part IX
Part IX of Form 990 is the IRS's version of the statement of functional expenses. It has four columns: (A) total, (B) program services, (C) management and general, and (D) fundraising. Section 501(c)(3) and 501(c)(4) organizations must complete all four columns; other exempt organizations must complete column (A) and may complete the rest.
The rows are fixed natural categories, including grants, compensation of officers and key employees, other salaries and wages, pension contributions, other employee benefits, payroll taxes, fees for services (management, legal, accounting, lobbying, professional fundraising, investment management and other), advertising, office expenses, information technology, occupancy, travel, conferences, interest, depreciation, insurance and other expenses, ending in total functional expenses on line 25. Line 26 reports joint costs from combined educational and fundraising campaigns, and the box is checked only if the organization followed FASB ASC 958-720 in allocating them.
Which return you file depends on size. Organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more, file Form 990. Smaller organizations can file Form 990-EZ (gross receipts under $200,000 and assets under $500,000) or, if normal gross receipts are $50,000 or less, the Form 990-N e-Postcard. Private foundations file Form 990-PF. Note that state charity regulators may have their own reporting requirements.
Allocating shared costs
The IRS instructions say to use your normal accounting method, any reasonable allocation method if your system does not allocate, and to document the method. Common, defensible bases are:
- Salaries: time records or periodic time studies. The IRS example: an employee who spends 40% of their time on fundraising and 60% on programs must be split 40/60, not reported as 100% program because the majority of their time was program work.
- Benefits and payroll taxes: in proportion to the salaries they relate to.
- Rent, utilities, depreciation of the building: square footage used by each function.
- Shared IT or phone costs: headcount or usage.
Worked example: a youth literacy nonprofit
Bright Pages is a 501(c)(3) youth literacy nonprofit in Milwaukee with $545,050 of expenses for the year. Here is how each natural expense is allocated, and why.
- Executive director salary, $95,000: time records show 30% supervising programs, 50% management, 20% fundraising. Program $28,500; management $47,500; fundraising $19,000.
- Program staff salaries, $210,000: all program. Program $210,000.
- Development manager salary, $62,000: all fundraising. Fundraising $62,000.
- Benefits and payroll taxes, $55,050 (15% of salaries), allocated with each salary: program $35,775; management $7,125; fundraising $12,150.
- Rent, $48,000: by square footage, 75% program, 15% management, 10% fundraising. Program $36,000; management $7,200; fundraising $4,800.
- Books and program supplies, $38,000: program $38,000.
- Accounting and audit fees, $14,000: management $14,000.
- Donor appeal mailing, $9,000: fundraising $9,000.
- General liability insurance, $6,000: management $6,000.
- Depreciation of furniture and computers, $8,000: by square footage. Program $6,000; management $1,200; fundraising $800.
Column totals:
- Program services: $28,500 + $210,000 + $35,775 + $36,000 + $38,000 + $6,000 = $354,275 (65.0%)
- Management and general: $47,500 + $7,125 + $7,200 + $14,000 + $6,000 + $1,200 = $83,025 (15.2%)
- Fundraising: $19,000 + $62,000 + $12,150 + $4,800 + $9,000 + $800 = $107,750 (19.8%)
- Total: $354,275 + $83,025 + $107,750 = $545,050, which ties back to the sum of the natural expenses.
That tie-out is the most important check: every row must add across to its natural total, and every column must add down to the functional totals in the statement of activities. Bright Pages also writes a short note describing the bases used (time records for salaries, square footage for occupancy and depreciation) to meet the ASU 2016-14 disclosure.
Common mistakes
- Allocating by budget instead of actual effort. Time studies or records give you a defensible basis.
- Putting the whole executive director in management. Time spent directly supervising programs or fundraising belongs in those columns.
- Hiding fundraising costs in program. The IRS instructions are explicit that fundraising expenses are not program expenses even if raising money is one of your purposes.
- Double-counting event costs. Direct fundraising event expenses go on Part VIII, line 8b, not Part IX.
- Numbers that do not match the audit. Part IX and the audited statement of functional expenses should reconcile; differences need an explanation.
- Undocumented methods. Write the allocation policy down and apply it consistently every year.
hellobooks< / a > -helps-nonprofits-track-functional-expenses">How HelloBooks helps nonprofits track functional expenses
HelloBooks lets you tag every transaction with a class, location or project, so you can set up program, management and general, and fundraising classes (and individual programs or grants beneath them) and record the function as you go rather than reconstructing it at year-end. Recurring journal entries with approval handle monthly allocations of rent or shared salaries, and the audit trail shows who approved each one. The chart of accounts can follow Form 990's natural categories, budget vs actual reports show each program against its grant budget, and the fixed assets register calculates depreciation for allocation. Your auditor or CPA can then review the grid and prepare the financial statements and Form 990 from clean, consistent data.
This is general information as of November 2026, not accounting, tax or legal advice. Check FASB ASC 958, the current Form 990 instructions, or a qualified CPA for your organization.
