January 30, 2015

Best Practices in Accounting for Fundraising Costs (article)

Many not-for-profit organizations rely on various methods of fundraising to further their mission and tax-exempt purpose and to ensure a sustainable future. As such, they engage in fundraising efforts, either using internal resources or by using the help of an outside, professional fundraiser, to attract potential donors.

How much a not-for-profit organization spends on fundraising costs must be tracked, and there is diversity in practice when it comes to accounting for these costs. These costs are required to be presented in the Form 990 in Part IX column D. Not-for-profits report the cost of all activities related to their fundraising efforts, including but not limited to publicizing and conducting fundraising campaigns; soliciting donations or services from individuals, foundations or other organizations; mailing list development/maintenance; event coordination and the management of such operations and related activities.

Increased IRS scrutiny of not-for-profits' Form 990s as well as increased public access to financial statement data through organizations like GuideStar makes accurate accounting for fundraising critical. Below, we have collected best practices you can use to ensure your not-for-profit clearly and accurately presents its fundraising expenses.

Direct Assignment of Fundraising Costs

Generally Accepted Accounting Principles (GAAP) suggests that direct assignment of costs to fundraising activities is preferable to other methods where possible. For example, it is far better to track time spent by an individual in fundraising than to use a global allocation of time spent. The proportion of time spent fundraising could be accounted for as follows: If the CEO of a not-for-profit organization spends 20 percent of his/her time fundraising for the organization, 20 percent of his/her salary would be included in the Form 990 Part IX fundraising expenses.

Other areas that tend to be allocated to fundraising costs include occupancy, which should be calculated using estimates of square footage of space used, and postage costs. If allocations are used, the organization should review the allocation rates periodically to verify they are accurate to how the organization uses those areas for fundraising. In the example above, the organization would verify that the CEO does indeed spend 20 percent of his/her time fundraising for the organization. If allocations are used, they should be reviewed periodically to ensure they remain accurate.

Presentation of Revenues and Expenses

Under GAAP, not-for-profit organizations are required to present revenues and expenses on a gross basis. If your organization uses external, professional fundraisers who keep a portion of the funds raised, you must report the revenue gross and the corresponding cost of the consultant as fundraising costs. This revenue cannot be presented on a net basis. Similarly, organizations that obtain funds via federated fundraising processes like the United Way must report revenue on a gross basis with the fees charged reflected as fundraising costs.

Joint Activity

There are special considerations in allocating costs to fundraising when a so-called "joint activity" occurs. A joint activity occurs when a program classified as management, general or some combination of these two becomes part of a fundraising process.

Before a not-for-profit organization designates a joint activity has occurred, it must consider the rules set out in FASB ASC Subtopic 958-720, Not-for-Profit Entities—Other Expenses. The rules outlined in ASC 958-720-45 require consideration of purpose, audience and content and include some challenging hurdles to overcome in order to allow for the allocation of joint costs among functions benefited. A detailed review of joint activity rules is beyond the scope of this article, but if your organization makes joint activity allocations, it would be wise to review the rules carefully to ensure that such costs meet the required criteria. The codification provides a flowchart about how to apply the criteria in ASC Paragraph 958-720-55-2.

Keep in mind, there are also additional disclosures required in the financial statement footnotes if your organization is allocating costs under the joint activity standards.

Further Scrutiny Anticipated

Not-for-profit organizations face mounting pressure from the IRS and other users of Form 990 financial statement data to display their expenses clearly and accurately. In light of this data becoming more available to potential donors, we recommend organizations review their approach to accounting for fundraising to verify that full and faithful fundraising cost reporting is taking place.

For further information about how to account for fundraising costs, please contact us.

Copyright © 2015, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that-unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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