What expense category is Functional Expense Allocation Services?

For nonprofit organizations, one of the most critical and complex aspects of financial reporting is the allocation of expenses into three functional categories: Program Services, Management and General (M&G), and Fundraising. 

The Statement of Functional Expenses, a key part of the annual Form 990, requires a detailed and reasonable methodology. Many nonprofits hire accountants or consultants for their expertise in creating and implementing these allocation plans.

The fees paid for these specialized professional services are a necessary cost of maintaining compliance and financial transparency. This guide will clarify how to categorize the fees for functional expense allocation services according to IRS and standard accounting principles to ensure your organization is reporting accurately.

Functional Expense Allocation Services Category

The fees you pay to an accountant or consultant to help you with functional expense allocation are a Management and General (Administrative) Expense.

This classification is based on the instructions for Form 990. Part IX, the Statement of Functional Expenses, requires organizations to report expenses by their function. 

Fees for general legal, accounting, and management services that support the overall organization are the definition of a Management and General expense. Since functional expense allocation is a core accounting and financial management task required for IRS compliance, the fees for this service fall squarely into this category.

Important Considerations While Classifying Functional Expense Allocation Services

The most critical factor is understanding that this is an administrative cost that supports the entire organization, not a direct program or fundraising cost.

An Administrative, Not a Program or Fundraising, Expense

• Management and General (Correct): The service of allocating expenses is an administrative function that benefits the organization as a whole by ensuring accurate financial reporting. It is part of the infrastructure that supports all your activities.
• Program (Incorrect): This fee does not directly go toward delivering your mission-related services to beneficiaries.
• Fundraising (Incorrect): This fee is not a direct cost of soliciting contributions, such as a direct mail campaign or a fundraising event.

The Purpose of the Service

The service you are paying for is financial management and compliance. It is a professional service that enables your organization to properly report how it spends its money across all functions. As such, it is a quintessential overhead or administrative cost.

Tax Implications and Recordkeeping

Properly accounting for these professional fees is essential for accurate Form 990 reporting.

How to Report the Expense

On Form 990, Part IX (Statement of Functional Expenses), the fees paid for functional expense allocation services should be included in Column (C), Management and general expenses. They would typically be reported on a line such as Line 11g, Other fees for services (non-employees).

This accurate reporting is crucial because donors and watchdog groups often analyze the ratio of an organization's M&G expenses to its program expenses to evaluate its efficiency.

What Records to Keep

You must have documentary evidence to substantiate the fees paid for these services. Your records should include:

• The engagement letter or contract with the accounting or consulting firm that clearly outlines the scope of work.
• Invoices from the firm detailing the services provided.
• Proof of payment for the fees.
• A copy of the allocation methodology or report provided by the consultant.

How Fyle Can Automate Expense Tracking for Allocation Services

Fyle helps you manage and document payments to your accounting and consulting professionals, ensuring every invoice is captured and ready for your Form 990.

• Centralize Invoices: Forward or attach your accounting or consulting firm invoices directly to Fyle for automatic and accurate data capture.
• Create a Clear Audit Trail: Fyle keeps the engagement letter, invoices, and proof of payment together in one easily accessible digital record.
• Track by Project: If the allocation service is part of a larger annual audit or accounting project, you can track all related costs together.
• Automate Your Accounting: Sync the categorized administrative expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.