Jitasa Nonprofit Blog

Support Center Question of the Week: Overhead Rates

We understand that our Nonprofit Accounting Support Center is a new and different product. That’s why each week we’ll highlight a question from a nonprofit organization to give you an idea how the service works and what people are asking. If you’re wondering how this service can benefit your nonprofit organization, read below.

This Week's Support Center Question

The Situation

We applied for a grant from a foundation. They tend not to support organizations that have an overhead rate above 25%. Our rate is 35% and they're giving us the opportunity to explain why it's so high. A CPA prepared our tax return so we're comfortable that the information in our return is accurate. Our rate of 35% is an accurate calculation based on the formula the foundation provided:

Form 990, Part IX on page 10: line 25c + 25d / page 1 line 12 = overhead %
Our numbers: $128,611 + $136,007 / $766,122 = 35%

The Question

Our organization is applying for a grant and our overhead needs to be 25% or below. How do I determine if the 35% stated above is an accurate representation of our overhead? 

The Week's Answer From Associate Marci Cozby

When figuring out your overhead percentage, look at your IRS Form 990. Specifically Part IX Expenses on page 10. 

From line 25 (total functional expenses) add together Columns C (management expenses) and D (fundraising expenses). Then divide this figure by line 12 on page 1 (total revenue current year). 

For example:
  • Line 25: column C is 58,000 and column D is 67,000 totaling $125000
  • Line 12 Col B on page 1 is $384,012
  • 125,000/384,012=.325 or  33% 
If your overhead is over the 25% you may need to look at your allocations to ensure you are allocating the right percentages to the right areas (administrative/management, program, fundraising). Look and see what lines on your Expenses Part IX are high and see if anything significant has changed in those areas. Did you hire a new employee in the last year? Are you using previous allocation amounts that need to be revisited? 

If you need to revisit your allocations figure out which lines (expenses) are high. Take the salary example again, if the allocated amounts seem high for administrative/management and fundraising expenses you should have your staff track their time in each area (administrative/management, program, fundraising) to see if the allocations are correct. If other indirect costs seem high take a look at your indirect cost allocations.  

Marci Cozby, Support Center Associate for Jitasa

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