Nonprofit Operating Expenses Guide: Categories & Rules 2025

Key Takeaways

• The three main categories of non profit operating expenses on Form 990: program services, management and general, and fundraising
• Program services expenses: costs directly tied to mission delivery such as program staff, program supplies, and direct service delivery
• Management and general expenses: administrative costs such as finance, HR, IT, legal, and governance that support the whole organization
• Fundraising expenses: costs to raise charitable contributions, including development staff, campaigns, special events, and fundraising consultants
• Key operating expense components: personnel, facilities, office and technology, insurance, marketing and communications, and professional services
• Best practices: clear functional classifications, consistent cost allocation methods, transparent reporting, and alignment with IRS Form 990 and FASB ASC 958 requirements
• FP&A tools such as Limelight complement nonprofit accounting software by providing expense budgeting, forecasting, variance analysis, and multi-year planning, rather than replacing the general ledger.
  

For many nonprofit CFOs and finance leaders, operating expenses sit at the center of difficult trade-offs.

You need enough program staff to meet demand, competitive salaries to keep people from burning out, and infrastructure that actually works. At the same time, you face constant pressure from donors and rating agencies to keep “overhead” low and program expense ratios high. Charity Navigator, for example, often expects 70% or more of total expenses to be spent on programs, with direct overhead costs (management and general plus fundraising) around 30% or less.

When organizations don’t categorize expenses accurately or apply allocations correctly, the consequences can be serious:

• Form 990 may not reflect reality
• Board members and funders get an incomplete or misleading picture
• Leaders make decisions on outdated or incomplete expense data
• Important investments in technology, staff development, or risk management are postponed because they are labeled “overhead”

Nonprofit financial teams already rely on accounting software to record every transaction. What they often lack is a clear, consistent framework for how operating expenses are grouped, allocated, monitored against budget, and used for forward-looking planning.

This guide walks through the core categories of nonprofit operating expenses, the components that sit inside them, and practical ways to manage and plan these costs. It will also show how FP&A software such as Limelight works alongside your accounting system to support budgeting, forecasting, and variance analysis for operating expenses.

Categories of Nonprofit Operating Expenses

Nonprofit operating expenditures breakdown

For US nonprofits filing Form 990, operating expenses are reported by function on the Statement of Functional Expenses:

• Program services
• Management and general
• Fundraising

Program services reflect direct mission delivery. Management and general covers administrative operations. Fundraising captures the costs of raising contributions and grants.

Many organizations also refer to “overhead,” which generally means the combination of management and general plus expenses for fundraising.

Below, we break down each category in more detail.

Program services expenses

Program services expenses directly relate to your exempt purpose. Donors and stakeholders typically want to see these as a high percentage of total spending.

Common examples: 

• Program salaries and benefits: frontline staff, program managers, caseworkers, teaching staff, clinicians
• Program materials and supplies: curriculum materials, food, equipment, client stipends, educational kits
• Direct service delivery costs: transportation for participants, facility rental for program delivery, field visits, outreach activities tied to a specific program
• Program-specific professional services: outside trainers, evaluators, or consultants hired for a defined program
• Grants and assistance to others: subgrants to partner organizations or direct financial assistance to beneficiaries

Why program services expenses matter

• They demonstrate how resources are being used to deliver outcomes, not just run the organization.
• Program expense ratios are widely referenced by donors, charity rating sites, and grantmakers.
• Many Form 990 readers look first at program services in Part III (program service accomplishments) and Part IX (the nonprofit statement for functional expenses) to understand impact per dollar.

Shared costs such as rent, utilities, IT, and support personnel must be allocated appropriately to programs as well as other functions to accurately reflect total program expenditure. Misclassification can distort efficiency ratios and donor perception. 

While program services show mission delivery, management and general expenses keep the organization legally compliant, financially sound, and operationally functional.

Management and general expenses

Management and general expenses (often called “administration” or “G&A”) support the overall operations of the nonprofit and are not directly tied to a specific program or fundraising activity.

Typical management and general expenses include: 

• Administrative staff salaries and benefits: finance, accounting, HR, IT, executive leadership, general operations
• General recordkeeping and reporting: bookkeeping, payroll, internal financial reporting, internal controls testing
• Legal and compliance: attorneys, audit fees, licensing, regulatory filings
• Governance: board meetings, board training, strategic planning that benefits the organization as a whole
• Office rent and utilities for shared administrative space: headquarters office, common areas, facilities used for multiple programs
• Organization-wide IT and security: core systems such as email, shared drives, cybersecurity tools, and general software licenses

Why management and general as a category matters

• FASB ASC 958 requires nonprofit organizations to present an analysis of their expenditures by function (program vs supporting activities) and natural classification, either on the face of the financial statements, in the notes, or in a separate statement.
• Well-funded management and general functions support internal controls, financial accuracy, risk management, and regulatory compliance
• Underinvesting in this category can lead to control failures, late filings, and errors in financial reporting.

In addition to administration and program delivery, nonprofit organizations invest in activities that bring in future contributions. These are classified as fundraising expenses.

Fundraising expenses

Expenditures for fundraising cover the costs of soliciting contributions and building donor relationships.

These include: 

• Development staff salaries and benefits: major gifts officers, grant writers, donor relations teams
• Fundraising campaigns: direct mail, email campaigns, social media ads, crowdfunding platforms
• Special events: venue rental, catering, event materials, online event platforms, payment processing fees
• Fundraising consultants and agencies: campaign strategy, capital campaign counsel, prospect research services
• Donor stewardship: recognition events, impact reports, donor communications primarily focused on solicitation

Why fundraising expenses matter

• Sustainable revenue often depends on consistent investment in fundraising activities.
• Accurate classification is key for Form 990 Schedule G, which requires additional reporting for some events and professional fundraisers.
• Donor expectations on program costs vs overhead spending need balance; underinvestment in fundraising can hurt future revenue.

Additional notes

• Depreciation and interest expense: Nonprofit organizations often allocate these among functions to reflect the cost of fixed assets and financing appropriately in functional expense reporting.
• Social enterprise/investment income: Some nonprofit organizations disclose income-generating activities, often separate from functional expenses but relevant to financial transparency.
• Expense allocation disclosures: FASB ASC 958 encourages clear disclosure of methods used for expense allocation and functional expense definitions to aid reader understanding.
• Overhead myth: Focusing solely on overhead percentages can be misleading; impact measurement and transparency are increasingly prioritized in the sector.

Now that we have covered the three functional categories of operating expenses, the next step is understanding the key components that show up across these categories.

Key Components of Operating Expenses

Regardless of functional category, most operating expenses can be grouped by natural classification. These components appear consistently across your Statement of Functional Expenses and should be allocated systematically among program services, management and general, and fundraising.

Personnel costs

Personnel costs are usually the largest portion of nonprofit budgets. They include:

• Salaries and wages: for both program and administrative staff
• Payroll taxes such as employer Federal Insurance Contributions Act (FICA) and unemployment insurance
• Employee benefits: health insurance, retirement contributions, paid time off

Key points:

• Time and effort reporting is often the basis for allocating staff costs across program, management and general, and fundraising.
• Organizations may use timesheets, activity logs, or reasonable estimates documented in policy.
• FASB guidance encourages allocation of personnel costs based on direct conduct and supervision of particular activities.

Facilities

Facilities costs support both program and administrative activities and typically include:

• Rent or mortgage payments for offices and program sites
• Utilities: electricity, water, internet, heating, and cooling
• Maintenance and repairs, including janitorial services and building upkeep
• Property-related insurance and taxes where applicable

Shared facilities costs should be allocated across functions using reasonable and documented methods, such as square footage used by each program, headcount, or usage patterns.

Office and technology

Office and technology expenditures keep day-to-day operations running.

Examples:

• Office supplies and printing
• Computers, laptops, and peripherals
• Software subscriptions: accounting systems, CRM, collaboration tools
• Phone and conferencing systems

Some technology is clearly program-related (for example, software used exclusively by a program team). Other tools support the entire organization and should be allocated across functions.

Insurance

Nonprofits typically carry several types of insurance:

• General liability: coverage for bodily injury or property damage claims
• Directors and officers (D&O): coverage related to governance and management decisions
• Professional liability: for clinical or professional services
• Property insurance: for owned buildings and equipment

Insurance costs often benefit multiple programs and supporting activities. Reasonable allocation methods, such as proportion of insured assets by program or overall expense ratios, help keep classifications consistent.

Marketing and communications

Marketing and communications can appear in different functional categories depending on their purpose.

Examples:

• Program awareness campaigns: communication aimed at potential clients or beneficiaries, often classified as program services
• Brand and general communications: materials that promote the organization as a whole, often classified as management and general
• Fundraising campaigns: donor appeals, events marketing, and major gift outreach, classified as fundraising

Joint activities involving fundraising and program components may require allocation based on content, audience, or purpose rather than all expenditures being classified as fundraising.

Professional services

Professional services support both program and back-office functions.

Common examples:

• Legal counsel
• Independent audit and tax services
• Program evaluation consultants
• IT and cybersecurity consultants
• HR consultants and recruiters

When services clearly relate to a specific program or fundraising campaign, classify them there. General legal or audit services typically fall into management and general.

With categories and components defined, the next step is putting in place practical approaches to budget, track, and report operating expenditures.

Best Practices for Managing Nonprofit Spending

Best practices for managing a nonprofit’s expenditures

1. Build a clear chart of accounts and functional mapping

Start with a chart of accounts aligned with Form 990 and FASB ASC 958 requirements. 

Practical steps:

• Map natural expense categories such as salaries, benefits, rent, utilities, supplies, professional services, depreciation
• Link each department or project to a functional category: program, management and general, fundraising
• Use segment codes or classes in accounting platforms to capture both natural and functional dimensions

This reduces year-end manual recoding and enables meaningful, timely expense reporting.

2. Use consistent, documented allocation methods

Indirect costs such as shared rent, general IT tools, or executive leadership time need reasonable allocation methods.

Common allocation bases include:

• Headcount or full-time equivalents by program or department
• Direct labor hours or personnel costs
• Square footage used by each program
• Direct expenditures as a proportion of total spending

Document these methods in an internal cost allocation policy and apply them consistently. Revisit them when your operating model changes, such as adding a new program site or restructuring teams.

3. Track operating expenditures by category in real-time

Instead of waiting until audit season, finance teams benefit from near real-time views of operating expenses by function and program.

Good practices:

• Schedule monthly financial reports that show operating expenses by program, management and general, and fundraising
• Compare actuals to budget for each category and flag significant variances for discussion
• Share summarized dashboards with leadership and program heads so they see how spending trends align with plans

Organizations that monitor expenses grouped by program, administrative, and fundraising activities throughout the year are better equipped for board and funder discussions and less likely to face year-end surprises.

4. Address overhead myths with data and context

The “overhead myth” can push nonprofits to underinvest in essential infrastructure. Recent guidance from sector groups and charity evaluators stresses that overhead ratios should not be the only measure of performance.

Practical steps:

• Provide narrative explanations with your financials that connect administrative costs and fundraising costs to better program outcomes
• Benchmark your program and overhead ratios against peers rather than chasing arbitrary targets
• Use internal metrics such as program outcomes, staff retention, and client satisfaction alongside expense ratios when presenting to the board

Some advisors still reference thresholds such as keeping administrative expenses below roughly 35% of total expenses. Treat those as rough guardrails, not rigid rules.

5. Align with IRS Form 990 and FASB ASC 958 requirements

Compliance is not only about filing on time. It is also about presenting a consistent and defensible view of your nonprofit’s expenses.

Key points: 

• Form 990 Part IX requires expenses to be reported by natural classification and by function
• FASB ASC 958 requires not-for-profit entities to present an analysis that disaggregates expenses by both function and nature in a single location in the financial statements, notes, or a separate statement
• Expense allocations should be supported by reasonable methods and reconciled to the general ledger
• Where possible, coordinate early with your auditors to confirm your allocation approach, especially if you are changing methods.

6. Use budgeting, forecasting, and scenario planning

Budgeting is where planning for operating expenses becomes strategic.

Good practice includes:

• Building budgets at both natural and functional levels so you can plan for total salaries and for program costs vs overhead splits
• Running scenarios for major decisions, such as adding a new program site, hiring additional clinical staff, or investing in new software
• Forecasting operating expenses over three to five years to evaluate sustainability and reserve needs

This is the point where FP&A tools like Limelight that connect directly to your accounting system can help, especially for multi-program, multi-site organizations.

7. Communicate clearly with boards and funders

Nonprofit boards and funders often have varying levels of financial literacy. Clear communication about your nonprofit’s expenses makes discussions more productive.

Tips:

• Use simple visuals to show the breakdown of program, management and general, and fundraising expenses
• Provide trend data for at least three years, not just a single snapshot
• Tie expense changes to strategic decisions; for example, a temporary rise in IT spending linked to a new case-management system

Nonprofits can strengthen financial stability by maintaining reserve funds that cover roughly three to six months of operating expenses, providing a buffer during periods of uncertainty. Clear expense policies also help tighten controls by outlining how reimbursements, approvals, and documentation should be handled.

Regular monthly or quarterly reviews make it easier to spot variances, address unauthorized spending, and identify opportunities to reduce everyday expenses. Strong documentation practices round out this discipline, ensuring that receipts, approvals, and functional allocations are organized and audit-ready.

Many of these practices depend on having both accurate historical financial data from your accounting system and a flexible planning layer on top. That is where FP&A platforms such as Limelight come into play.

How Limelight Helps You Forecast and Manage Operating Budgets

Limelight FP&A helps nonprofits with managing their operating budgets

Accounting software records every transaction and produces your trial balance, general ledger, and Form 990 support. For many nonprofit finance teams, the gap is in forward-looking planning. They need a way to model nonprofit operating expenses, test scenarios, and monitor budget versus actuals without exporting everything to static spreadsheets.

Limelight is Excel-free, FP&A software that integrates with nonprofit accounting platforms such as QuickBooks, Sage Intacct, Aplos, and Blackbaud to provide this financial planning and analysis layer. It does not replace your general ledger or handle day-to-day expense recording; instead, it pulls actual expense data from those systems and helps you plan what comes next.

Core capabilities that support operating expense management include:

Integration with accounting platforms

Limelight integrates with accounting systems

Limelight connects to ERP and accounting systems so actual operating expenses flow into planning models without manual rekeying. Real-time data syncing ensures budgets and forecasts reflect the latest actuals from your general ledger.

Pre-built nonprofit templates

Limelight’s pre-built templates for nonprofit organizations

Financial teams can budget by functional category (program services, management and general, fundraising) and by program, grant, or location, eliminating the need to build models from scratch.

Multi-program expense planning and scenario modeling

Limelight FP&A solution for scenario planning

Test strategic decisions before implementation. Model questions such as "What if we launch a new program in a second region?" or "What if we adjust fundraising headcount?" and see operating expense impacts over time. Scenario planning helps leadership evaluate trade-offs and build confidence in plans.

Budget versus actual variance analysis

Compare plans to actuals by function, program, or expense category. Drill into the drivers behind variances to understand where actual spending diverged from expectations and why. This level of visibility supports rapid course correction.

Multi-year expense forecasting

Build three- to five-year operating expense forecasts to support strategic planning, reserve policies, and grant applications. Forward-looking forecasts help boards and individual donors understand long-term sustainability.

Dashboards and alerts

Configure views tailored for CFOs, controllers, program leaders, and board members. Set thresholds and receive alerts when expense categories exceed limits, enabling proactive nonprofit financial management.

By automating data pulls from your accounting system and centralizing models in a single FP&A platform, Limelight helps reduce manual spreadsheet work for operating expense budgets and forecasts. Finance teams can spend more time explaining trends, advising leadership on strategic decisions, and supporting board discussions instead of consolidating files and recalculating formulas. This shift from manual work to strategic analysis strengthens overall financial governance.

Nonprofit organizations like Communication Service for the Deaf already use Limelight alongside their accounting solution to support the nonprofit budgeting process and planning at scale.

CSD client testimonial for Limelight

To see how Limelight could integrate with your current tech stack and support nonprofit financial planning around operating expenses, you can book a tailored demo with the Limelight team.

FAQs

What are the key categories of nonprofit operating expenses?

Nonprofit operating expenditures are grouped into program services, management and general, and fundraising. These categories reflect the organization’s mission delivery, administration, and revenue generation, and are required on the Form 990 Statement of Functional Expenses.

How can nonprofits reduce operating expenses while maintaining their mission?

Nonprofits can review vendor contracts, allocate shared costs accurately, invest in efficient systems, and use scenario planning to test staffing or program changes before committing. FP&A tools like Limelight help model trade-offs without cutting critical services.

What are the IRS rules for reporting nonprofit expenses?

The IRS requires expenses on Form 990 to be reported by natural classification and by function: program services, management and general, and fundraising. Allocations must be reasonable and supportable, and certain fundraising efforts require additional schedules.

How do I track restricted vs unrestricted expenses for my nonprofit?

Use your accounting system to tag revenue and related expenditures as restricted or unrestricted at the grant, project, or fund level. Combine that with functional classifications so you can see how restricted dollars support program, administrative, and fundraising activities over time.

What tools can help me manage nonprofit operating expenses?

Most nonprofits pair their accounting solution for transaction processing with FP&A tools for planning. Platforms such as Limelight pull actuals from systems like QuickBooks, Sage Intacct, Aplos, or Blackbaud to support operating expense budgeting, variance analysis, and multi-year forecasting.