One of the most common questions we receive from nonprofit clients is about expense classification.
“Should our Executive Director’s salary be program or management?”
“Where do audit fees go?”
“Can accounting staff be allocated to programs?”
These questions matter because, under U.S. GAAP, nonprofits are required to present expenses by both natural classification (salaries, rent, office supplies, depreciation, etc.) and functional classification (program services, management and general, and fundraising).
While GAAP provides the framework, it doesn’t include a master list assigning every expense to one function. Instead, organizations must use reasonable judgment, apply consistent methodologies, and document their approach.
Below are some practical guidelines we share with nonprofit clients throughout the year.
Start with the Purpose of the Expense
The easiest way to think about functional expense classification is to ask one simple question:
Why was this expense incurred?
The answer—not the account title—usually determines its function.
The classification should generally follow the nature of the activity being performed, not simply the department, funding source, or grant charged.
Generally:
- Program Services include costs directly related to carrying out your organization’s mission.
- Management and General includes costs associated with governing, managing, and administering the organization as a whole.
- Fundraising includes costs incurred primarily to solicit contributions and support development activities.
The same type of expense—such as salaries, rent, software subscriptions, or insurance—may be allocated among all three functions depending on how it supports the organization.
What About Activities That Combine Fundraising and Program Activities?
Some nonprofit activities serve more than one purpose. For example, a newsletter or educational campaign may contain both program information and a fundraising solicitation. These activities may be subject to the joint-cost guidance in ASC 958-720. Organizations should evaluate the purpose, audience, and content of the activity before allocating costs between program services and fundraising.
What Typically Belongs in Management and General?
Management and general expenses are those incurred to oversee and administer the nonprofit rather than directly provide services or raise contributions.
Examples often include:
- Executive administration
- Accounting and finance
- Payroll processing
- Human resources
- Board governance
- Legal services
- General insurance
- Information technology supporting the entire organization
- Strategic planning
- General office administration
- Annual financial statement audits
These costs help the organization function but generally aren’t directly tied to a specific program or fundraising effort.
A Quick Reference Guide
The table below summarizes how these expenses are generally classified. Keep in mind that many expenses require allocation based on actual usage or employee time.
| Expense | Usually Classified As | Notes |
| Executive Director salary | Often allocated | Based on actual time spent on program oversight, administration, and fundraising. |
| Program Director salary | Program Services | Unless significant administrative responsibilities exist. |
| Accounting staff salaries | Management & General | Accounting, financial reporting, budgeting, and grant accounting/reporting activities generally remain M&G. Do not allocate to program merely because the accounting activity relates to a particular grant or program. |
| Human Resources | Management & General | Usually administrative in nature. |
| Payroll processing | Management & General | Supports the organization as a whole. |
| Annual financial statement audit | Management & General | Generally classified as administrative. |
| Tax return preparation | Management & General | Includes Forms 990 and related compliance. |
| Legal fees | Usually Management & General | Unless directly related to a specific program or fundraising activity. |
| Office rent | Usually allocated | Often allocated based on square footage. |
| Utilities | Usually allocated | Consistent with occupancy allocation methodology. |
| Building depreciation | Usually allocated | Based on use of the facility. |
| Office supplies | Often allocated | Depends on who uses the supplies. |
| IT software and licenses | Often allocated | Allocate when software or service is used directly by multiple functions. Organization-wide administrative IT costs may appropriately remain in management and general. |
| General liability insurance | Usually allocated | Allocate based on the nature and extent of the coverage and the functions benefiting from the insurance. A reasonable and consistently applied methodology should be used for shared coverage. |
| Board meeting expenses | Management & General | Related to governance. |
| Development staff salaries | Fundraising | Primarily devoted to donor development. |
| Event expenses | Depends on the nature of the event. | Unless the event is primarily programmatic. |
| Program supplies | Program Services | Directly support mission delivery. |
| Volunteer coordinator | Depends on duties | May support programs, fundraising, or administration. |
Common Questions We Receive
Does the Executive Director’s salary belong in Management and General?
Usually, only partially.
Executive Directors wear many hats. During a typical week they may supervise program staff, meet with donors, attend board meetings, develop organizational strategy, review financial reports, and participate in program planning.
Because their responsibilities span multiple functions, compensation is frequently allocated based on a reasonable estimate of time spent performing each activity.
Are audit fees Management and General?
Generally, yes.
Financial statement audit fees typically support governance, financial reporting, and oversight of the organization. As a result, they are generally reported as management and general.
If your engagement includes additional work directly attributable to a grant or compliance requirement, there may be circumstances where portions are classified differently.
Can occupancy costs be allocated?
Absolutely. Rent, utilities, depreciation, maintenance, and other facility costs are among the most commonly allocated expenses.
Common allocation methods include:
- Square footage
- Employee headcount
- Time usage
- Department occupancy
- Other reasonable and consistently applied methodologies
The important point is that the allocation should reasonably reflect how the facility is actually used.
There Isn’t One “Correct” Percentage
One misconception is that there is a target percentage for management and general expenses. There isn’t. Two organizations with similar budgets may appropriately report very different functional expense allocations because their operations differ. Functional expense percentages should not be used in isolation to evaluate an organization’s effectiveness or efficiency.
For example, one nonprofit may have a highly centralized administrative team, while another embeds finance staff within programs. Both may be following GAAP correctly.
The objective is not to minimize administrative expenses, rather to classify expenses faithfully based on how resources are actually used. Consistency Is Just as Important as Accuracy.
Once your organization develops allocation methodologies, they should be documented, applied consistently from year to year, reviewed periodically as responsibilities evolve and supported by reasonable documentation.
Common Mistakes We See
Some of the most frequent issues we encounter during nonprofit audits include:
- Charging the Executive Director’s entire salary to management and general without considering program oversight.
- Charging all occupancy costs to one function instead of allocating them.
- Continuing to use allocation percentages established years ago even though employee responsibilities have changed.
- Not documenting how allocation percentages were developed.
Addressing these issues before year-end can significantly reduce audit adjustments and improve the quality of your financial reporting.
GAAP vs. Form 990
The functional expense classifications used in U.S. GAAP and Form 990 are generally similar, but the reporting requirements are not identical. Organizations should not assume that an amount reported in a particular functional category on Form 990 automatically determines the appropriate classification in the financial statements. The organization’s financial statements should be prepared in accordance with U.S. GAAP, while Form 990 should be prepared in accordance with the IRS instructions applicable to that return.
Final Thoughts
Functional expense reporting is intended to provide donors, grantors, board members, and other users of your financial statements with a meaningful picture of how your organization uses its resources.
Rather than asking, “How can we maximize our program percentage?” the better question is:
“How can we most accurately reflect how our organization operates?”
Organizations that establish thoughtful allocation methodologies, review them periodically, and apply them consistently are typically better prepared for year-end reporting and experience a smoother audit process.
If you’re unsure how a particular expense should be classified, discussing it before year-end is often much easier than making significant reclassifications during the audit. A short conversation now can save time later and help ensure your financial statements accurately reflect your organization’s operations.
CST Group CPA’s focuses on non-profit accounting (financial statements, 990 tax preparation, and more) and would be happy to connect to learn how we can assist your organization.
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