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Friday, September 30, 2016

Program Expense: A Closer Look

A few weeks ago, we published a blog post defining Program Expense Percentage, one of our seven Financial Health metrics. That post explained in detail how we calculate and assess an organization’s spending on programs and services, but what exactly counts as a program expense?

The IRS defines program services as “mainly those activities that further the organization's exempt purposes.” This is in contrast to the two support categories, administrative expenses, and fundraising expenses, which contribute to the functioning of the organization but are not directly related to the organization’s mission. Program expenses include a variety of mission-focused expenses, including salaries for program-conducting employees, grants, and cause-specific costs that can be anything from providing healthcare to putting on an artistic performance. Any cost that contributes directly to the exempt purpose of an organization is considered a program expense.

It is important to note that salaries for employees providing services in accordance with an organization’s mission can and should be included as a program expense. A simple example is that of the salary of a veterinarian at a nonprofit animal hospital. The animal hospital’s mission is to heal sick or injured animals and the veterinarian’s role is to fulfill that mission, so that salary counts as a program expense.

Further, one should not look to judge an organization’s program expense solely on the amount it spends on grants. For one, many organizations do not provide grants to others at all, but instead, provide services of their own. Additionally, many other organizations both provide grants and direct services and discounting the latter would seriously underestimate an organization’s contribution to its mission.

The simplest method of determining how much an organization spends on programs and services is to inspect line 25B of Part IX of its IRS Form 990. Cherry-picking any other values from an organization’s statement of functional expenses will only distort the actual picture of an organization’s operations.

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