Accounting for Fundraising Expenses

It goes without saying that, for many nonprofits, fundraising is a crucial element towards achieving its goals. Not only does fundraising generate revenue to support mission-critical programs, it can also provide a valuable opportunity to raise awareness for your cause.

Guaranteeing your organization’s success beyond the next quarter requires careful planning and prioritizing, as well as accurate financial reporting to ensure long-term viability. Nonprofits must take special care when disclosing fundraising expenses in their records. These expenses should be recorded by the organization internally on the Statement of Functional Expenses and reported to the IRS on the Form 990.  Properly tracking and reporting fundraising expenses can be a challenging task. Read on to learn what constitutes a fundraising expense, where this information should be reported, the purpose behind this reporting, and more.

What are fundraising expenses?

Fundraising expenses are incurred by an organization while trying to raise funds. Classic examples of fundraising expenses include:

  • Fundraising events and functions (silent auctions, fundraising dinner, a charity concert, a golf event, etc.)
  • Funds spent to compensate the organization’s employees engaging in fundraising activities (maintaining donor lists, conducting activities to solicit contributions, meeting with potential donors, etc.)
  • Mailings and other literature designed to generate funds (creating digital and printed postcards, brochures, flyers and other materials).

The IRS Form 990 defines fundraising expenses as “the total expenses incurred in soliciting cash and noncash contributions, gifts, and grants.”  They are reported as a specific functional expense classification on an organization’s financial statements and tax forms. It is worth noting that there are certain fundraising activities that are not reported as a fundraising expense. For example, cost of accounting for contributions, cost of direct benefits to event attendees, or time spent by volunteers are generally not reported as a fundraising revenue or expense.

What is the purpose behind reporting fundraising expenses?

As a general rule, nonprofit organizations aim to maximize the amount they spend on program expenses and minimize spending in other areas. This signals to current and prospective donors that the organization is one that is actively working toward delivering on its mission and not mismanaging funds or focusing on the wrong priorities. Keeping track of and reporting fundraising expenses allows the organization to operate with full financial transparency. Donors and other stakeholders appreciate knowing that most of their support is being used for mission-centric purposes.

What information is included when reporting fundraising expenses?

As previously mentioned, fundraising expenses include any expenses incurred by an organization while trying to raise funds, including both direct and indirect costs. Indirect costs might include expenses that may not be obvious as being connected to the fundraising effort, such as expenses incurred when marketing for a fundraising event. There are three different categories under which fundraising expenses must be reported:

  • Costs related to fundraising events or other similar efforts.
  • Costs associated with compensating fundraisers.
  • Costs associated with fundraising generally. (These expenses may be part of the organization’s operating budget as administrative and program expenses, but are specifically related to fundraising efforts and must be reported as such.)

Major vs Incidental Fundraising Expenses

Another important consideration is whether special events are “ongoing and major” or ”peripheral and incidental.” The difference in these categories depends on the significance of revenue and the frequency of the event. For some organizations, fundraising is one of their most predominant and ongoing activities. For others, fundraising activities occur less frequently. While you must report fundraising expenses regardless of whether they are major or incidental, the distinction might impact the amount you must report and where you must report it. For example:

  • If fundraising is an ongoing and major activity for the organization, the gross expense must be reported on the statement of activities as a fundraising expense.
  • If fundraising is an incidental activity and part of a special event, only the net amount needs to be reported.

Many organizations have incorrectly reported fundraising expenses. In order to ensure that you and your organization comply with the many IRS requirements, take advantage of the wealth of resources and publications that describe IRS requirements for reporting fundraising expenses. The IRS provides a list of instructions along with the Form 990, and many nonprofit accounting websites spell out their best advice to make the process a bit easier. Better yet, don’t be afraid to call in an expert. Nonprofit accountants are familiar with fundraising expense tracking and reporting as they work with it every day.

If you need assistance with your fundraising expense tracking, we are here to help! Schedule a free consultation to learn how Chazin & Company can improve the integrity of your accounting data and enhance the efficiency or your nonprofit’s accounting and finance function.

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Chazin & Company

With over 19 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.

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