The Nonprofit 990: Best Practices Every Nonprofit Leader Should Know
- Emily Reed
- 2 days ago
- 3 min read
For many nonprofit leaders, the IRS Form 990 feels like an administrative hurdle—something you file because you have to. In reality, your 990 is one of the most important public documents your organization produces. It tells your story to funders, watchdog organizations, and potential partners, often before you ever speak to them directly.
Understanding how the 990 works—and how your financial decisions show up on it—can make the difference between being viewed as a high-capacity, trustworthy organization or one that appears unprepared for growth.
What Is the Form 990, Really?
The Form 990 is the annual informational return required for most tax-exempt organizations. While it is filed with the IRS, it is publicly available and regularly reviewed by:
Foundations and corporate funders
Major donors and donor-advised fund (DAF) advisors
Board members and prospective board recruits
Nonprofit evaluators like Charity Navigator and Candid/GuideStar
In short: your 990 is a credibility document, not just a tax form.
Why Expense Allocation Matters So Much
One of the most critical, and misunderstood, parts of the 990 is how expenses are allocated across three categories:
Program Services – Direct costs tied to delivering your mission
Management & General (Administrative) – Governance, finance, compliance, and operations
Fundraising – Grant writing, donor development, campaigns, and related staff or consultant costs
Funders don’t expect nonprofits to operate without administrative or fundraising expenses. What they do expect is appropriate, reasonable allocation.
Common Benchmarks Funders Look For
While there is no single “perfect” formula, widely accepted best practices include:
~75–85% Program Expenses
~10–15% Fundraising
~5–10% Administrative
Organizations that drastically underreport fundraising or administrative costs may raise red flags—just as much as organizations that overspend in those areas.
How Ratings Organizations Interpret Your 990
Organizations like Charity Navigator use your 990 data to generate financial health and accountability scores. These scores influence whether donors even consider learning more about your mission.
Key areas they assess include:
Program expense ratio
Fundraising efficiency
Administrative overhead
Governance and transparency practices
Consistency year over year
An organization that underinvests in fundraising or misclassifies expenses may look artificially “lean,” but this often results in lower ratings and reduced funder confidence over time.
The Hidden Risk of Misclassification
A common mistake among growing nonprofits is placing nearly all costs under “program” in an attempt to look efficient. This can backfire.
For example:
Grant writing salaries or consulting fees should be partially (or fully) allocated to fundraising
Executive leadership time must often be split between program, admin, and fundraising
Financial systems, audits, and compliance costs belong in administration
A Practical Example When Using Your Company Card
Scenario: You purchase printed curriculum materials for a program and print them at Staples. When your bookkeeper reviews the transaction, they see “Staples” and automatically categorize it as an Administrative expense. In reality, this cost directly supports program delivery and should be classified as a Program Expense.
Why this matters: Without context, bookkeepers must rely on vendor names alone, which can lead to misclassification and distorted expense ratios on your Form 990.
Key takeaway: Clear communication is essential. Program leaders and executives must proactively inform bookkeeping and finance staff about the purpose of expenses so costs are allocated accurately. Good allocation starts with good communication.
990 EZ vs. Full 990: Planning Ahead
Smaller organizations may file the 990-EZ, but once revenue grows, the full 990 becomes mandatory. When that transition happens, watchdog organizations begin scoring you automatically.
This is why planning early matters. Building sound financial practices before you’re required to file the full 990 helps ensure that your first public rating reflects strength—not growing pains.
Best Tips for Nonprofit Leaders
Budget intentionally for fundraising (including grants) instead of treating it as overhead to minimize
Track staff time and shared expenses accurately across categories
Educate your board on why fundraising and admin costs are investments, not liabilities
Review your draft 990 strategically, not just for errors
Aim for consistency year over year—sudden swings raise questions
Final Thought
Strong nonprofits are not the ones that appear to spend the least—they are the ones that invest wisely, report honestly, and plan for sustainability.
Your 990 is one of the clearest signals to funders that your organization is ready to steward larger gifts, manage growth, and deliver long-term impact. Treat it as a strategic asset, and it will work for you long after tax season ends.
This checklist is intended for educational purposes and does not replace professional tax or legal advice.
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