The Lilly School of Philanthropy has projected that 2021 and 2022 will see positive gains in philanthropy, with a 4.1% increase in 2021 and a 5.7% increase in 2022. Individual/household giving is expected to have a year-over-year increase of 6% in 2021 and 3.9% in 2022. This is in spite of 33% of nonprofit executives expecting a decline in philanthropic giving, according to the CCS Fundraising Survey January Report. However, most of those nonprofits are basing their projections on not being able to host fundraising events.

Furthermore, according to an article in the March 30 Chronicle of Philanthropy, financial experts are also projecting a positive outlook as we head further into 2021 and beyond, based on the following:

1) Strong growth in the Gross Domestic Product

2) The stock market is near an all-time high and remains relatively unscathed by the pandemic

3) Government spending has provided temporary relief for many nonprofits, along with also shoring up states so that support can continue locally

4) February’s jobless rate was at 6.2%. While this recovery has been a “K” recovery – with many people still struggling to recover, having a large percentage of the workforce that has significantly recovered, bodes well for charitable giving and optimistic projections.

By: Susan Rosati                               

The IRS requires nonprofits to divide their expenses into three categories that include program, management and general, and fundraising for filing the 990 tax return. Essentially, functional expenses describe the purpose of any expense. This is different as compared to natural expenses, which are based on the type of payment such as supplies or insurance.

Program expenses are the expenses needed to run the core mission of the nonprofit and are usually the biggest group. These are the costs that are delivered through programs or services. They also include direct or indirect program expenses. Direct expense are tied directly to the program, such as staff who deliver your services. Indirect expenses, such as utilities or billing services, are often allocated because they do not tie to any one particular program. Traditionally, donors prefer nonprofits that spend most of their money on programs and do not like funding “overhead.” However, during the pandemic we have seen a significant shift away from that perspective as more donors rely they need to support the entire organization if they want their nonprofits to survive and thrive.

Management and general expenses are supporting expenses that cannot directly tie to your programs. These expenses can include insurance, human resource management, or rental space allocated for administration.

Fundraising expenses are those costs incurred raising contributions for the organization. This could include expenses related to fundraising events, direct mailers requesting donations, and wages of fundraising personnel.

It is important that nonprofits understand how to categorize functional expenses so that they are following IRS guidelines. However, there are no specific IRS requirements given on determining them. Nonprofits need to develop a functional allocation plan and document it. If your Executive Director is spending time thinking and planning how to grow a new service to meet a growing need in the community, that should be considered a program expense. However, if the Executive Director is meeting with a donor, that time is fundraising costs. And if time is spent planning a new hire orientation, then that would fall under Management and General Expenses.

Functional expenses are broken down in a matrix on the 990. They are also critical because of the audience reviewing them. Funders, donors, grantors, regulators, board members and the press all look to the 990 functional expenses as a way to understand how well the nonprofit is spending towards fulfilling their mission. So your organization should pay attention as well as to how your expenses are allocated in order to give the most accurate picture of your organization’s investment in your mission and your community.