Guide to nonprofit expenses: Categories and tracking tips

When managing a nonprofit organization, it’s important to stay mindful of your expenses and capital budget. Every dollar spent on non-essential costs is a dollar that can’t go toward advancing your mission.

Maintaining tax-exempt status also comes with strict IRS requirements, including how funds are spent and reported, making accurate expense tracking a must. Most nonprofits incur costs across five primary categories:

1. Operating expenses
2. Personnel expenses
3. Functional expenses
4. Administrative expenses
5. Developmental expenses

We break down the nonprofit expenses list into key categories, highlight IRS compliance considerations, and share best practices to help your organization track spending with confidence.

Why nonprofits need to track expenses

Expense tracking and management are key parts of effectively running a nonprofit organization. Some of the main reasons why include:

• Cost visibility: Understanding where your money goes on a monthly, quarterly, and annual basis makes it easier to create accurate cash flow projections and budget for both the short and long term
• Budget optimization: When you know what you’re spending, it’s easier to cut non-mission-critical costs and redirect that funding toward your core programs
• Transparency and accountability: A clear view into your organization’s revenue and expenses builds trust with donors and helps guide strategic discussions with your board
• Maintaining tax-exempt status: The IRS requires a nonprofit, also known as an exempt organization, to document its income and expenses annually as part of its compliance obligations

Categorizing expenses can be tricky, especially when costs overlap between functions or change month to month. Many nonprofits also struggle to align their budgets with IRS reporting requirements while managing fluctuating costs and limited resources. Expense tracking ensures transparency and protects your tax-exempt status.

IRS rules and compliance for nonprofit expenses

Maintaining your nonprofit’s tax-exempt status means staying compliant with IRS requirements. That starts with understanding how the IRS expects nonprofits to categorize expenses, track records, and report their financial activity.

Expense categorization requirements

The IRS requires nonprofits to categorize their expenses into three main buckets:

• Program expenses: Tie directly to your mission-related activities
• Management and general expenses: Relate to running the organization as a whole
• Fundraising expenses: Cover the process of soliciting donations and managing donor relationships

Proper expense categorization helps demonstrate that your nonprofit is focused on its mission, a key factor the IRS considers when evaluating tax-exempt organizations.

Recordkeeping and documentation

Good recordkeeping isn’t just a best practice; it’s essential for compliance. Nonprofits should maintain clear documentation of the following:

• Revenue and donations received
• Categorized expenses with supporting receipts or invoices
• Board meeting minutes and financial decisions
• Payroll expenses and employee benefit records

Consider using an automated system, like expense management or accounting software, or working with a nonprofit accountant to ensure your records are complete and audit-ready.

Reporting obligations

Most nonprofits are required to file Form 990, the IRS’s annual information return. This form includes detailed information about your organization’s financials, governance, and programs. Smaller nonprofits may qualify to file Form 990-N or 990-EZ, depending on revenue thresholds.

What happens if you don’t comply?

Non-compliance with IRS rules can lead to penalties, increased scrutiny, or even revocation of your nonprofit’s tax-exempt status. Inconsistent records or misclassified expenses can also erode donor trust and hurt your organization’s credibility.

What are the functional categories of nonprofit expenses?

To maintain tax-exempt status, nonprofits must report expenses using three functional categories recognized by the IRS. Proper categorization shows that your organization uses its funds appropriately and supports compliance with Form 990 requirements.

Complete list of nonprofit expenses

Your mission, focus, donor base, and structure are unique to your nonprofit organization, and so are its expenses. However, there are some commonalities across all nonprofits. Here’s a breakdown of common nonprofit expense types you’re likely to encounter:

Operating expenses

Operating expenses include the direct overhead costs required to keep your nonprofit running. These are often recurring costs that are essential to maintaining your physical or digital workspace, like:

• Rent, lease, or mortgage payments for office space
• Utilities (electricity, gas, water)
• Debt financing and interest payments
• Local taxes and property taxes
• Office supplies and cleaning supplies
• Electronics and equipment (laptops, printers, scanners)

If your organization actually creates a product, whether to sell or donate, your operational budget also includes associated costs, like materials or components. Operating budgets also often include personnel, functional, and administrative expenses, which we cover below in more detail.

Personnel expenses

Personnel expenses refer to any costs associated with compensating and supporting your staff. These often make up a large portion of a nonprofit’s annual budget. For example:

• Employee salaries
• Performance bonuses and incentives
• Health care coverage
• Life insurance and disability coverage
• Tuition reimbursement
• Retirement contributions
• Other employee perks or benefits

Functional expenses

Functional expenses are any expenditures related to specific departments or functions within your organization. This is true whether your organization handles these functions in-house or outsources them to a third-party vendor or partner. Some examples include:

• Marketing, advertising, and PR
• Website development and hosting
• Social media management and promotion
• Donor outreach and engagement tools
• IT support and software subscriptions
• Strategic or operational consultants

From a nonprofit accounting perspective, functional expenses typically fall into one of three broad categories highlighted above: program, management and general, or fundraising.

Administrative expenses

Administrative expenses cover the behind-the-scenes operations that keep your nonprofit compliant, organized, and running smoothly. These are often fixed costs tied to internal operations and governance. Examples of administrative costs include:

• Administrative staff salary and wages
• Board travel and meeting expenses
• Accounting services and accounting software (bookkeeping)
• Legal services
• HR and payroll service providers
• Team training and development
• Business and property insurance
• Business travel expenses
• Depreciation and amortization

This category also includes miscellaneous expenses, like permitting, licensing, and compliance.

Developmental expenses

Developmental expenses support your fundraising efforts, both through one-time events and ongoing donor outreach. These expenses are critical for driving the revenue that funds your mission. For example:

• Volunteer recruitment and appreciation events
• Volunteer background checks and screening
• Fundraising costs, like dinners, galas, and banquets
• Walk-a-thons, 5K and 10K races
• Silent auctions
• Phone-a-thons
• Community fundraisers
• Capital campaigns
• Thank-you gifts for donors

It can also include non-event-related expenses, such as costs associated with grant proposals and soliciting donors.

Recurring vs. variable vs. one-time costs

In addition to the categories outlined above, your nonprofit’s expenses can also be grouped by frequency and predictability: recurring, variable, and one-time. While some overlap may occur, classifying expenses this way helps you build a more flexible and accurate budget.

• Recurring costs, also called regular or fixed costs, are any expenses your organization incurs on a regular, repeating schedule, such as on a weekly, monthly, quarterly, or yearly basis. Recurring costs are the same cost each time, so they’re easy to work into your projections and budgets. Common examples include rent, salaries, insurance premiums, phone and internet bills, and software subscriptions.
• Variable costs change over time and can be harder to predict. These include utility bills, raw materials, event food or supplies, shipping, and travel expenses. Since variable costs fluctuate, it’s important to monitor them regularly and adjust your budget accordingly.
• One-time costs are non-recurring expenses that either happen unexpectedly or are planned in advance but don’t repeat. These might include new equipment purchases, legal fees, or major repairs. While planned one-time expenses can be budgeted in, surprise costs can strain your cash flow if you're not prepared.

Tips for tracking nonprofit expenses

Nonprofit accounting can be complicated and requires a thorough understanding of both accounting best practices, nonprofit law, and tax law. If you’re not already employing a nonprofit accountant, you may want to consider doing so to shape your policies and generate financial reports and financial statements.

As you’re thinking about your budgeting process and how your organization tracks and manages expenses, here are a few best practices to guide your process:

Establish expense, reimbursement, and credit card policies

A clear and thorough expense policy, reimbursement policy, and credit card policy can go a long way in helping your employees and stakeholders understand the difference between necessary and inappropriate spending. These documents outline key information related to how your organization spends its funds, including:

• Expense categories
• Your expense approval process
• Documentation requirements (like receipts)
• Reimbursable vs non-reimbursable expenses
• Authorized actions
• Spending limits
• Terms of use

Accurately categorize expenses

You need accurate records of both your revenue and your expenses to retain a tax-exempt status with the IRS. Properly categorizing your nonprofit’s expenses is a key part of meeting documentation requirements. It also provides you with clearer insight into how your organization allocates its funds.

Require receipts and documentation

Documenting your nonprofit’s expenses with receipts isn’t just a best practice; it’s a necessity. Failure to properly document expenses can result in losing your tax-exempt status. Likewise, failing to document employee reimbursements with receipts means that those reimbursements risk becoming taxable income.

Schedule regular reviews and reconciliations

Conduct monthly or quarterly reviews of your expenses to check for discrepancies, flag unauthorized spending, and identify opportunities to reduce costs. Frequent reviews also help ensure your financial data stays current and accurate.

Maximize resources by cutting unnecessary costs

Reviewing expense trends over time can help you identify non-essential spending and reallocate those funds toward mission-critical programs. Trimming even small costs can free up resources that make a big impact elsewhere.

Prioritize transparency

Transparent expense tracking isn’t just about staying compliant. It also builds credibility with donors, board members, and grantmakers. Well-documented and reported expenses show that your nonprofit is responsible and mission-focused.

Simplify nonprofit expense management with Ramp

Whether your nonprofit is just getting off the ground or already well-established, Ramp offers a smarter way to manage expenses and stay financially compliant.

Ramp’s automated expense management software can help your nonprofit gain control over its spending without the manual overhead. We automatically categorize every transaction, flag for policy violations, and sync to your accounting system, saving you time and ensuring compliance with IRS requirements.

Employees can spend responsibly with custom guardrails, including preset budgets, spending limits, and auto-enforced policies. We also handle the tedious parts: collecting receipts, enforcing documentation rules, and flagging issues before they become problems. Whether it’s a donor dinner or software renewal, you can account for every dollar.

Try an interactive product tour to learn more about how Ramp can meet your nonprofit’s needs.