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Resources for Your Nonprofit

Functional Expense: What it is, why it matters, and how to track it

Nonprofit Functional Expense

Nonprofit Organizations have increased scrutiny on their finances because of their tax exempt status. Funders want to know how much of their donation goes directly to delivering programs. The way this is recorded and reported on is through Functional Expense.

Unfortunately, many nonprofits don’t know how to track this well and/or they misunderstand the definitions of the functions. This results in a distorted view of how much the organization spends on programs and can mislead potential donors and rating agencies.

What is Functional Expense

Why Functional Expense Matters

How to Classify Functional Expense

Defining the Functions


Functional expense allocation is necessary, but with a clear procedure it's easy. By following the IRS guidance and developing clear indirect expense allocation procedures, it's easy for an organization to show a majority percentage of expense as program services expense. This helps to ensure donors of the efficacy of their donation and leads to higher ratings from the rating agencies.  

Yes, there is a paradigm shift underway to rid the nonprofit world of the 80% program expense expectation. Until then, nonprofits must follow GAAP and allocate their expenses by function accordingly. 


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