How Much Can a Non-Profit Legally Spend on Overhead?

The amount a nonprofit can spend on overhead is directly related to the amount of income a nonprofit generates. Internal Revenue Service rules give guidelines for how a nonprofit deals with budgeting and expenses. While it doesn't limit the amount by percentage, it does require the fulfillment of a particular mission. If a nonprofit appears to be organized for something other than executing its stated mission, the organization's tax exempt status could be jeopardized.

When people ask about a nonprofit's overhead, they generally mean administrative costs, especially salary and fundraising expenses. Although other aspects of operations get charged to overhead, these two expenses raise the most concern. For example, building expenses are overhead. A nonprofit daycare might spend most of its funding on care providers, building expenses and maintenance, but those expenses are part of fulfilling its mission. If the same nonprofit spent most of its income on fundraising, however, it might raise a question about the nonprofit's demonstrable purpose.

Administrative salaries and fundraising expenses are generally expected to take 25-35 percent of a given budget. These expenses might be higher but, generally, a nonprofit can avoid raising operational integrity questions if it spends more than 50 percent of its income on executing its mission. This rule is as much to assure potential donors as to assuage IRS concerns. A nonprofit must account for the percentage of its expenses each year by filling out IRS form 990 or a variation thereof. By carefully preparing the backup documents for the form, a nonprofit can assure both its potential donors and the IRS of its operational integrity.

Some argue that valuing a nonprofit's performance based on overhead expenses alone does not evaluate an organization effectively. Many nonprofits don't correctly account for overhead costs. For example, overhead costs associated with grant applications and management may be undervalued. If a grant covers the cost of its management, that can be deducted from general overhead costs. As always, it is important to consult a tax professional when it comes to cost reporting questions.

There are few things more difficult in tax law than having a nonprofit status reinstated after it has been revoked. Nonprofits are the beneficiaries of many tax leniencies at both the federal and state level and as such have a certain public trust to uphold. When it comes to making decisions that could affect a nonprofit's status, it is critical to have a tax professional review a nonprofit's documents. A qualified accountant can answer any questions about the proportion of overhead a nonprofit spends in a given budget year.