All 501(c)(3) and (c)(4) nonprofit organizations who are required to file a Form 990 (not including Form 990-EZ or 990-N) must allocate expenses to functions in Part IX of their 990 informational returns.  All other nonprofit organizations who file Form 990 have the option to allocate expenses to functions in Part IX of the 990 but are not required to do so. Generally, the cost allocation system for both direct and indirect expenses used in the organization’s accounting system can serve as the basis for the allocations on the 990.  However, there are a few important points to consider:

Only three categories of expenses are present on the 990.

The three categories are:

• • Program
  • Management & General
  • Fundraising

If a nonprofit has any expenses assigned to membership development in its financial statements, it needs to determine a reasonable way of allocating those to the other three categories.

Primary natural expense categories have been pre-set by the IRS for certain types of expenses.

Some rearranging of expense categories to transform the natural expenses in the financial statements to the expense categories of the 990 might be required.

One example of this is expenditures classified as “grants and assistance” for 990 reporting purposes. These expenditures are required to be classified as program expenses on the 990 and will differ from the classification on the financial statements if categorized as otherwise.

There are differences in the treatment of certain types of expenses for GAAP reporting purposes for financial statements and IRS reporting for the 990.

Below are a few examples of these differences and how they are treated differently between the two:

Expenses related to In-kind Services

• • GAAP: Expenditures are typically reported on the statement of functional expenses
  • IRS: Expenditures are not recognized for 990 reporting purposes

Rental expenses (that are associated with rental income activities)

• • GAAP: Expenditures are typically reported on the statement of functional expenses
  • IRS: Expenditures are reported as a net against rental income on the statement of activities

Costs of inventory sold

• • GAAP: Expenditures are typically reported on the statement of functional expenses.
  • IRS: Expenditures are reported as a net against gross sales of inventory on the statement of activities

Direct expenses related to fundraising events

• • GAAP: Expenditures (not including cost of direct benefit to donor) are typically reported on the statement of functional expenses
  • IRS: Expenditures are reported as a net against gross fundraising revenue on the statement of activities

Gaming expenses

• • GAAP: Expenditures are typically reported on the statement of functional expenses
  • IRS: Expenditures are reported as a net against gross gaming revenue on the statement of activities

Investment expenses

• • GAAP: Expenditures are typically net against investment income on the statement of activities
  • IRS: Expenditures are reported on the statement of functional expenses

Have more questions about the IRS Form 990? The Wegner CPAs nonprofit advisors are here to help. Reach out to your nonprofit tax specialist with any questions, and download our free guide: Form 990 FAQs and Preparation Checklist.