Form 990: Statement of Functional ExpensesFebruary 19, 2021
Part 9 of our 990 series covers everything you need to know about the statement of functional expenses.
*Editor's Note: This blog has been updated as of February 19, 2021 for accuracy and comprehensiveness.
Our 990 series continues with an overview of the statement of functional expenses. The Statement of Functional Expenses (Part IX, page 10) is where you must report the details of your organization’s expenses and indicate whether those expenses were used for program services, management and general or fundraising purposes.
What is the statement of functional expenses?
This schedule has provided 23 lines with specific descriptions and guidance of what expenses fall within each category. Then line 24, “other expenses” is where you would report any expenses that did not fall in any of the pre-listed descriptions. Do not include expenses on line 24 that fit into any of the categories on lines 1 to 23. The only expenses which should appear on line 24 are expenses that clearly do not fit into a previous category.
Before we go into some of the details for lines 1 through 23, we need to understand how the expenses are allocated between program services, management and general and fundraising on the functional expense report.
- Program Service expenses are the direct and indirect costs associated with furthering an organization’s exempt mission.
- Management and General expenses are not identifiable with a specific program or fundraising activity, but are required for the organization to operate. For example, the following are costs that are typically recorded as management and general expenses:
- General recordkeeping
- Office management activities
- General accounting, auditing, budgeting and financial reporting
- General liability insurance
- General office activities
- Fundraising expenses are costs associated with soliciting others to contribute money, time, etc. for which a contributor will receive no direct benefit. For example, the following are costs that are typically recorded as fundraising costs:
- Personnel or consultants
- Occupancy costs
- Printing, postage, telephone costs
- Direct mail lists, direct contact solicitations, etc.
Let’s go over the lines that typically have the most questions.
First, line 5. Enter the total compensation for your organization’s current officers, directors, and key employees for your tax year (which is different than what is reported on Part VII or Schedule J. On Part VII or Schedule J, the compensation reported is based on the calendar year that falls within the organization’s tax year.) Then on line 7, enter the total compensation for employees (that are not previously reported), and their respective compensation.
Line 13, office expenses, includes a few expenses that we typically see written out on line 24, but they qualify to be included in line 13. This line includes, office supplies, telephone expenses, postage and delivery expenses, shipping, equipment rentals, bank fees, and other similar costs.
Line 16, occupancy costs, includes rent, utilities, property insurance, real estate taxes, mortgage interest; and other similar occupancy-related expenses.
Line 20, interest. This line is meant for any interest expenses incurred during the year, but not attributable to rental property or any mortgage interest, as those expenses are reported on a separate line.
Line 23, insurance. Report all insurance on this line, except employee-related insurance (i.e. health, life or disability insurance) on this line, as they should be included with employee compensation or property or occupancy-related insurance, as those expenses are reported on line 16.
Lastly, line 26, joint costs. These are costs that have been incurred in a combined educational and fundraising campaign. Many organizations publish a monthly or quarterly newsletter containing both educational material and a fundraising solicitation. (Actually, many organizations add a solicitation request to every mailing.) This type of publication is subject to the “joint cost” allocation process. If you are sending material out to the public that is partly educational and partly a solicitation for support, you must be aware of the “joint cost” rules. If you have any questions about joint costs, check out our blog “Is My Nonprofit Allocating Joint Costs Properly?”.
Read our entire series on Understanding the Importance of your Form 990.