Glossary of nonprofit finance terms

Short, plain-language definitions for terms used across this site and in charity filings generally. When in doubt about a word elsewhere on this site, it should be defined here.

501(c)(3)

The section of the US tax code under which most public charities and private foundations are recognized as tax-exempt; donations to a 501(c)(3) public charity are generally tax-deductible for the donor.

Form 990 / 990-EZ / 990-N / 990-PF

The annual information return most tax-exempt organizations must file with the IRS. Which variant applies depends mainly on size; see reading the public records.

EIN (Employer Identification Number)

A unique federal ID number for an organization, used to look it up in IRS and state databases.

Program service expenses

Spending directly on the organization's charitable activities, as opposed to overhead.

Management & general expenses

Overhead spending on administration — finance, HR, governance, and similar overhead costs not tied to a specific program or to fundraising.

Fundraising expenses

Spending specifically to solicit contributions, gifts and grants.

Functional expense allocation

The accounting process of splitting each expense (like salaries) across program, management and fundraising categories on Form 990 Part IX — the basis for the overhead ratio.

Overhead ratio

Management and fundraising expenses as a share of total spending. Widely used but limited as a quality measure — see the overhead myth.

Public support test

The mechanism (Form 990 Schedule A) by which a public charity demonstrates it draws broad public support rather than being controlled by a small number of donors, distinguishing it from a private foundation.

Private foundation

A nonprofit typically funded by a single source (an individual, family, or company) that generally makes grants rather than running its own direct programs; subject to different rules (990-PF) than public charities.

Related-party transaction

A financial dealing between the organization and someone with influence over it (a board member's company, for instance) — not inherently improper, but subject to disclosure and conflict-of-interest review.

Restricted / unrestricted funds

Restricted funds are donor-designated for a specific purpose and can only be spent accordingly; unrestricted funds can be used at the organization's discretion.

Fiscal sponsorship

An arrangement where an established nonprofit administers funds and legal/tax status on behalf of a project that isn't independently incorporated as a charity.

In-kind donation

A non-cash contribution — goods, services or property — reported at estimated fair value.

Watchdog seal / rating

A badge, star rating, letter grade or standards-compliance mark issued by an independent charity evaluator; see charity rating tools compared for how the major ones differ.

Audited financial statements

Financial statements reviewed by an independent outside accounting firm, generally a stronger assurance than self-reported figures alone.

Board independence

The degree to which a nonprofit's governing board is free of staff members, relatives of staff, or others with a direct financial stake in the organization's decisions.

Conflict-of-interest policy

A governance policy requiring board and staff to disclose, and recuse themselves from decisions involving, personal or financial interests that could bias the organization's choices.

Rebuttable presumption of reasonableness

The IRS process by which a nonprofit's board can establish that executive compensation is presumed reasonable, using independent approval and comparability data; see understanding executive pay.