When addressing your SOFE (Statement of Functional Expenses) for the upcoming audit, it is important to remember that the SOFE must be broken out into its three functional categories. Those are program services, management and general (M&G) and fundraising.
Now, your nonprofit may have a standing template for which you fill out the SOFE and this may already have all three categories allocated properly. If this is the case, then you are well on your way to having a clean audit of your SOFE. This is not only good news for your auditor, but this also means that your Form 990 could take much less time to prepare as well. Not getting into trouble with the IRS is something that we all want and these two tips should further those chances.
Where should you be spending time on the SOFE?
Make sure to have rental income and expenses, special events, gaming (including raffles), in-kind services, sales of inventory and investment expenses correctly allocated to their proper categories. Some of these accounts such as special events have nuances to them that can be tricky. The more detail about these items you can provide the better, such as:
- How many special events did you hold?
- How many attendees were there?
- What was the ticket price?
- Were any items donated?
- What was the fair market value that attendees received?
To have these answers represented on a schedule or worksheet can make all the difference. These are some of the most common accounts that your 990 preparers as well as auditor, will have questions about.
What are some key expense reporting items?
These would be sections such as compensation and fees for services. I know that you may want to simply combine similar amounts, but it is important to make sure that all amounts are properly allocated. You should consider whether members of your staff work or hold positions in multiple areas such as programs, M&G and fundraising, and then make sure those amounts are broken out correctly and that there is a basis for the allocation.
Taking time to make sure your SOFE is properly set up and displays the right allocations to each category will not only help your auditors and tax preparers, but also will ensure that accurate amounts are presented for those who are interested in the information on the SOFE. Who are these parties?
• State regulators with jurisdiction over organizations soliciting charitable contributions
• Other stakeholders and constituents
The SOFE plays a key role in showing those outside your organization how healthy it is. When donors can trust that administration is not taking advantage of too many resources this then allows for those donors to give confidently.
If you are unclear about how to allocate expenses on your SOFE or you would like your SOFE to be laid out better speak to your auditor as I am sure they will have great solutions and tips for you to use.