Return of Organization Exempt From Income Tax and
Short Form Return of Organization Exempt From Income Tax

Part II - Statement of Functional Expenses

In General -

Column (A)

All organizations must complete column (A) unless they are using an approved DOL form or Form 5500 as a partial substitute for Form 990. See General Instruction F.

Columns (B), (C), and (D)

These columns are optional for all organizations except section 4947(a)(1) nonexempt charitable trusts and section 501(c)(3) and (4) organizations. Section 4947(a)(1) nonexempt charitable trusts and section 501(c)(3) and (4) organizations must complete columns (B), (C), and (D).

In Part II, the organization's expenses are designated by object classification (e.g., salaries, legal fees, supplies, etc.) and allocated into three functions: program services (column (B)); management and general (column (C)); and fundraising (column (D)). These functions are explained below in the instructions for the columns. Do not include in Part II any expense items you must report on lines 6b, 8b, 9b, 10b, or 16 in Part I.

For reporting to the IRS only, use the organization's normal accounting method to report total expenses in column (A) and to segregate them into functions under columns (B), (C), and (D). However, for state reporting requirements, see General Instructions E and G. If the accounting system does not provide for this type of segregation, a reasonable method of allocation may be used. The amounts reported should be accurate and the method of allocation documented in the organization's records.

Report, in the appropriate column, expenses that are directly attributable to a particular functional category. In general, allocate expenses that relate to more than one functional category. For example, allocate employees' salaries on the basis of each employee's time. For some shared expenses such as occupancy, supplies, and depreciation of office equipment, use an appropriate basis for each kind of cost. However, you should report some other shared expenses in column (C) only. The column instructions below discuss allocating expenses.

Column (A) - Total

For column (A), total each line item of columns (B), (C), and (D) in Part II. Except for expenses you report on lines 6b, 8b, 9b, 10b, or 16 of Part I, you should use column (A) to report all expenses the organization paid or incurred.

Column (B) - Program services

Program services are mainly those activities that the reporting organization was created to conduct and which, along with any activities commenced subsequently, form the basis of the organization's current exemption from tax. They may be self-funded or funded out of contributions, accumulated income, investment income, or any other source. Fundraising expenses should not be reported as program related expenses even though one of the functions of the organization is to solicit contributions for other organizations.

Program services can also include the organization's unrelated trade or business activities. For example, publishing a magazine is a program service even though the magazine contains both editorials and articles that further the organization's exempt purpose and advertising, the income from which is taxable as unrelated business income.

If an organization receives a grant to do research, produce an item, or perform a service, either to meet the grantor's specific needs or to benefit the public directly, the costs incurred represent program service expenses. Do not treat these costs as fundraising expenses, even if you report the grant on line 1 as a contribution.

Column (C) - Management and general

Use column (C) to report the organization's expenses for overall function and management, rather than for its direct conduct of fundraising activities or program services. Overall management usually includes the salaries and expenses of the chief officer of the organization and that officer's staff. If part of their time is spent directly supervising program services and fundraising activities, their salaries and expenses should be allocated among those functions.

Other expenses to report in column (C) include those for meetings of the board of directors or similar group; committee and staff meetings (unless held in connection with specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, personnel, and other centralized services; preparation, publication, and distribution of an annual report; and investment expenses (however, report rental income expenses on line 6b and program-related income expenses in column (B)).

You should report only general expenses in column (C). Do not use this column to report costs of special meetings or other activities that relate to fundraising or specific program services.

Column (D) - Fundraising

Fundraising expenses are the total expenses incurred in soliciting contributions, gifts, grants, etc. Report as fundraising expenses all expenses, including allocable overhead costs, incurred in: (a) publicizing and conducting fundraising campaigns; (b) soliciting bequests and grants from foundations or other organizations, or government grants reportable on line 1c; (c) participating in federated fundraising campaigns; (d) preparing and distributing fundraising manuals, instructions, and other materials; and (e) conducting special events that generate contributions reportable on line 1a, in addition to revenue reportable in the right-hand column on line 9a. However, report any expenses that are directly attributable to revenue shown on line 9a (i.e., the direct expenses incurred in furnishing the goods or services sold) on line 9b.

Allocating indirect expenses

Colleges, universities, hospitals, and other organizations that accumulate indirect expenses in various cost centers (such as the expenses of operating and maintaining the physical plant) that are reallocated to the program services and other functional areas of the organization in single or multiple steps may find it easier to report these expenses in the following optional manner:

First, report the expenses of these indirect cost centers on lines 25 through 43 of column (C), Management and general, along with the expenses properly reportable in that column.

Second, allocate the total expenses for each cost center to columns (B), (C), and (D) (Program services, Management and general, and Fundraising) as a separate item entry on line 43, Other expenses. Enter the name of the cost center on line 43. If any of the cost center's expenses are to be allocated to the expenses listed in Part I (such as the expenses attributable to special events and activities), enter these expenses as a negative figure in columns (A) and (C). This prevents reporting the same expense in both Parts I and II. If part of the total cost center expenses are to be allocated to columns (B), Program services, and (D), Fundraising, enter these expenses as positive amounts in these columns and as single negative amounts in column (C), Management and general. Do not make any entries in column (A), Total, for these offsetting entries.

Example. An organization reports in column (C) $50,000 of its actual management and general expenses and $100,000 of expenses of an indirect cost center that are allocable in part to other functions. The total of lines 25 through 43 of column (C) would be $150,000 before the indirect cost center allocations were made. Assume that $10,000 (of the $100,000 total expenses of the cost center) was allocable to fundraising; $70,000 to various program services; $15,000 to management and general functions; and $5,000 to special events and activities. To report this in Part II under this alternate method:

1. Indicate the cost center, the expenses of which are being allocated, on line 43, as Allocation of (specify) expenses;
2. Enter a decrease of $5,000 on the same line in the column (A), Total, representing the special event expenses that were already reported on line 9b in Part I;
3. Enter $70,000 on the same line in column (B), Program services;
4. Enter $10,000 on the same line in column (D), Fundraising; and
5. Enter a decrease of $85,000 on the same line in column (C), Management and general, to represent the allocations to functional areas other than management and general.

After making these allocations, the column (C) total (line 44, column (C)) would be $65,000, consisting of the $50,000 actual management and general expense amount and the $15,000 allocation of the aggregate cost center expenses to management and general.

The above is an example of a one-step allocation that shows how to report the allocation in Part II. This reporting method would actually be needed more for multiple step allocations involving two or more cost centers. The total expenses of the first would be allocated to the other functions, including an allocation of part of these expenses to the second cost center. The expenses of the second cost center would then be allocated to other functions and any remaining cost centers to be allocated, and so on. The greater the number of these cost centers that are allocated out, the more difficult it is to preserve the object classification identity of the expenses of each cost center (e.g., salaries, interest, supplies, etc.). Using the reporting method described above avoids this problem.

Note: The intent of the above instructions is only to facilitate reporting indirect expenses by both object classification and function. These instructions do not permit the allocation to other functions of expenses that should be reported as management and general expenses.

Line 22 - Grants and allocations

Enter the amount of awards and grants to individuals and organizations selected by the filing organization. United Way and similar fundraising organizations should include allocations to member agencies.

Report voluntary awards and grants to affiliated organizations for specific (restricted) purposes or projects also on line 22, but not required payments to affiliates reportable on line 16.

Report scholarship, fellowship, and research grants to individuals on line 22. Certain other payments to, or for the benefit of, individuals may be reportable on line 23 instead. See the instructions for line 23 for details.

Report only the amount of actual grants and awards on line 22. Report expenses incurred in selecting recipients, or monitoring compliance with the terms of a grant or award, on lines 25 through 43.

In the spaces provided, give separate totals for cash and noncash grants and allocations made. Cash grants include only grants and allocations paid by cash, checks, money orders, wire transfers, and other charges against funds on deposit at a financial institution.

Reporting for line 22, in accordance with SFAS 116, is acceptable for Form 990 purposes, but not required by IRS. However, see General Instruction E.

An organization that makes a grant to be paid in future years should, according to SFAS 116, report the grant's present value on line 22. Accruals of present value increments to the unpaid grant should also be reported on line 22 in future years.

Attached schedule. Attach a schedule of amounts reported on line 22. Any grants or allocations reported on line 22 that were approved during the year, but not paid by the due date for filing Form 990 (including extensions), must be identified and listed separately in the schedule for line 22. Show on the schedule: (a) each class of activity; (b) donee's name, address, and the amount given; and (c) (in the case of grants to individuals) relationship of donee if related by blood, marriage, adoption, or employment (including employees' children) to any person or corporation with an interest in the organization, such as a creator, donor, director, trustee, officer, etc.

On the schedule, classify activities in more detail than in such broad terms as charitable, educational, religious, or scientific. For example, identify payments for nursing services, laboratory construction, or fellowships.

If property other than cash is given, also show on the schedule: (a) a description of the property; (b) its book value and how the book value was determined; (c) its fair market value and how the fair market value was determined; (d) the date of the gift. If the fair market value of the property when the organization gave it is the measure of the award or grant, record any difference between fair market value and book value in the organization's books of account and on line 20.

Colleges, universities, and primary and secondary schools are not required to list the names of individuals who were provided scholarships or other financial assistance whether they are the recipients of Federal grant money or not.

Line 23 - Specific assistance to individuals

Enter the amount of payments to, or for the benefit of, particular clients or patients, including assistance rendered by others at the expense of the filing organization. Do not include grants to other organizations that select the person(s) to receive the assistance available through the use of the grant funds. For example, report a payment to a hospital to cover the medical expenses of a particular individual on line 23, but do not report a contribution to a hospital to provide some service to the general public or to unspecified charity patients on this line. Also, do not include scholarship, fellowship, or research grants to individuals even though selected by the grantor organization. Report these grants on line 22 instead.

Attached schedule. Attach a schedule showing the total payments for each particular class of activity, such as food, shelter, and clothing for indigents or disaster victims; medical, dental, and hospital fees and charges; and direct cash assistance to indigents. For payments to indigent families, do not identify the individuals.

Line 24 - Benefits paid to or for members

For an organization that provides benefits to members or dependents (such as organizations exempt under section 501(c)(8), (9), or (17)), attach a schedule. Show amounts of: (a) death, sickness, hospitalization, or disability benefits; (b) unemployment compensation benefits; and (c) other benefits (state their nature). Do not report the cost of employment-related benefits the organization provides its officers and employees on this line. Report those expenses on lines 27 and 28.

Line 25 - Compensation of officers, directors, etc.

Enter the total compensation paid to officers, directors, trustees, and key employees for the year. In Part V, give the name and compensation (if any) of each officer, director, trustee, and key employee, along with the other information requested. If no compensation was paid, enter zero. See the Part V instructions for a definition of key employee.

Form 941 must be filed to report income tax withholding and social security and Medicare taxes. The organization must also file Form 940 to report Federal unemployment taxes unless the organization is not subject to these taxes. See Pub.15 (Circular E) for details. See also the discussion of the Trust Fund Recovery Penalty given in General Instruction D.

Line 26 - Other salaries and wages

Enter the total of employees' salaries not reported on line 25.

Line 27 - Pension plan contributions

Enter the employer's share of contributions to qualified and nonqualified pension plans for the year. Complete Form 5500 for the organization's plan and file as a separate return. If the organization has more than one plan, complete a form for each plan. File the form by the last day of the 7th month after the plan year ends. See General Instruction D for a discussion of Form 5500.

Line 28 - Other employee benefits

Enter the organization's contributions to employee benefit programs (such as insurance, health, and welfare programs) that are not an incidental part of a pension plan included on line 27. Report expenses for employee events such as a picnic or holiday party on line 28.

Line 29 - Payroll taxes

Enter the amount of Federal, state, and local payroll taxes for the year but only those taxes that are imposed on the organization as an employer. This includes the employer's share of social security and Medicare taxes, the Federal unemployment tax (FUTA), state unemployment compensation taxes, and other state and local payroll taxes. Do not include taxes withheld from employees' salaries and paid to the various governmental units such as Federal and state income taxes and the employees' shares of social security and Medicare taxes.

Line 30 - Professional fundraising fees

Enter the organization's fees to outside fundraisers for solicitation campaigns they conducted or for consultation services connected with a solicitation of contributions by the organization itself.

Line 31 - Accounting fees

Enter the total accounting and auditing fees charged by outside firms and individuals who are not employees of the reporting organization.

Line 32 - Legal fees

Enter the total legal fees charged by outside firms and individuals who are not employees of the reporting organization. Do not include any penalties, fines, or judgments imposed against the organization as a result of legal proceedings. Report those expenses on line 43, Other expenses.

Line 33 - Supplies

Enter the total for office, classroom, medical, and other supplies used during the year, as determined by the organization's normal method of accounting for supplies.

Line 34 - Telephone

Enter the total telephone, telegram, and similar expenses for the year.

Line 35 - Postage and shipping

Enter the total amount of postage, parcel delivery, trucking, and other delivery expenses, including the cost of shipping materials. Include the costs of outside mailing services on this line.

Line 36 - Occupancy

Enter the total amount paid or incurred for the use of office space or other facilities, heat, light, power, and other utilities (other than telephone expenses reported on line 34), outside janitorial services, mortgage interest, property insurance, real estate taxes, and similar expenses.

Occupancy expenses paid or incurred for program-related income, reportable on line 2, are included on line 36. Do not subtract rental income received from renting or subletting rented space from the amount reported for occupancy expense on line 36. If the activities of the organization's tenant are related to the reporting organization's exempt purpose, report rental income as program-service revenue and allocable occupancy expenses on line 36. However, if the tenant's activities are not program related, report such rental income on line 6a and related rental expenses on line 6b.

Do not include, as an occupancy expense, depreciation (reportable on line 42) or any salaries of the reporting organization's own employees (reportable on line 26).

Line 37 - Equipment rental and maintenance

Enter the cost of renting and maintaining office equipment and other equipment, except for automobile and truck expenses reportable on lines 35 and 39.

Line 38 - Printing and publications

Enter the printing and related costs of producing the reporting organization's own newsletters, leaflets, films, and other informational materials on this line. Also include the cost of any purchased publications. However, do not include any expenses, such as salaries or postage, for which a separate line is provided in Part II.

Line 39 - Travel

Enter the total travel expenses, including transportation costs (fares, mileage allowances, and automobile expenses), meals and lodging, and per diem payments.

Line 40 - Conferences, conventions, and meetings

Enter the total expenses incurred by the organization in conducting meetings related to its activities. Include such expenses as the rental of facilities, speakers' fees and expenses, and printed materials. Include the registration fees (but not travel expenses) paid for sending any of the organization's staff to conferences, meetings, or conventions conducted by other organizations. However, do not include on this line the salaries and travel expenses of the reporting organization's own officers, directors, trustees, and employees who participate.

Line 41 - Interest

Enter the total interest expense for the year. Do not include any interest attributable to rental property (reportable on line 6b) or any mortgage interest treated as occupancy expense on line 36.

Line 42 - Depreciation, depletion, etc.

If the organization records depreciation, depletion, and similar expenses, enter the total for the year. Include any depreciation (amortization) of leasehold improvements. The organization is not required to use the Modified Accelerated Cost Recovery System (MACRS) to compute the depreciation reported on Form 990 or Form 990-EZ. If the organization records depreciation using MACRS, attach Form 4562, or a schedule showing the same information required by Form 4562. If the organization does not use MACRS, attach a schedule showing how depreciation was computed.

For an explanation of acceptable methods for computing depreciation, see Pub. 946.

If the organization claims a deduction for depletion, attach a schedule explaining the deduction.

Line 43 - Other expenses

Show the type and amount of each significant expense for which a separate line is not provided. Report all other miscellaneous expenses as a single total. Expenses that might be reported here include investment counseling and other professional fees, but not professional fundraising fees, accounting fees, or legal fees. These are reportable on lines 30 through 32.

Other expenses includible on line 43 are: penalties, fines, and judgments; unrelated business income taxes; insurance and real estate taxes not attributable to rental property or reported as occupancy expenses; and any marketing and distribution costs not included on other lines of Part II. Attach a schedule if more space is needed.

State reporting - miscellaneous expenses. Some states that accept Form 990, or Form 990-EZ, in satisfaction of their filing requirements may require that certain types of miscellaneous expenses be itemized regardless of amount. See General Instruction E.

Line 44 - Total functional expenses

Add lines 22 through 43 and enter the totals on line 44 in columns (A), (B), (C), and (D). Report the total amounts for columns (B), (C), and (D) in Part I, lines 13 through 15.

Reporting of joint costs

Organizations that included in program service expenses (column (B) of Part II) any joint costs from a combined educational campaign and fundraising solicitation must disclose how the total joint costs of all such combined activities were reported in Part II. Organizations answering Yes to the joint-cost question following line 44 must furnish the relevant financial data in the spaces provided.

An organization conducts a combined educational campaign and fundraising solicitation when it solicits contributions (by mail, telephone, broadcast media, or any other means) and includes, with the solicitation, educational material or other information that furthers a bona fide nonfundraising exempt purpose of the organization.

Expenses attributable to providing information regarding the organization itself, its use of past contributions, or its planned use of contributions received are not program service expenses and should not be included in column (B). This is true whether or not the organization accounts for joint costs in accordance with the AICPA's Statement of Position 98-2, Accounting for Costs of Materials and Activities of Not-for-Profit Organizations and State and Local Government Entities that Include Fund Raising. Any method of allocating joint costs to program service expenses must be reasonable under the facts and circumstances of each case. Most states with reporting requirements for charitable and other organizations that solicit contributions either require or allo the reporting of joint costs according to Statement of Position 98-2 standards.

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