Joint Cost Allocations Increasingly Applied
to New Media Formats
More nonprofits are allocating the joint costs of
fundraising and program activities conducted in newer media formats,
such as websites, where the fundraising activities are conducted in
conjunction with program activities, management activities, or both.
In the past, allocation of joint costs was largely applied to
more traditional fundraising media formats such as direct mail.
Joint costs allocation is allowed by the American
Institute of Certified Public Accountant’s (AICPA) Statement of
Position (SOP) 98-2, which establishes financial accounting
standards for allocating the costs of joint activities.
SOP 98-2 states that joints
costs in which fundraising is only a part of the purpose of certain
activities can be allocated to fundraising, management and program
expenses. For example, a
non-profit that sends out a letter that asks for a donation but also
educates the public on issues related to the non-profit's exempt
purpose can allocate the costs associated with the letter to both
fundraising and program expenses (assuming public education is an
exempt function of the charity.) These allocations can also be made to the cost of telephone solicitation, telethons,
special events and now – new media.
The SOP provides guidance on how to functionally
allocate joint costs associated with multi-purpose activities such
as the cost of the postage for this type of mailing, or as which cannot
directly be allocated to one of these functions, such as the postage
for a mailing or, as described above the costs associated with a
letter of this type. The SOP guidelines are important as the
IRS requires tax-exempt organizations to disclose in
their Form 990 whether they allocate joint costs, and if so, whether
they are complying with SOP 98-2.
This firm has seen the IRS, state regulators, and
charity watchdogs take a keen interest in organizations’ allocation
of joint costs as part of their review or investigation processes
because they believe monitoring the proper allocation of joint costs
is critical to ensuring that organizations are fairly stating their
respective fundraising, program, and management/administrative
costs. Regulators and
watchdogs generally pay closer to organizations joint cost
allocations when more than half of the total joint costs have been
allocated to program costs.
Although many organizations are generally aware
that they can allocate joint costs of fundraising activities, they
are often unfamiliar with the preliminary criteria that must be met
in order to allocate joint costs, or they do not know how to
properly apply the rules set forth in SOP 98-2.
If your organization has questions relating to its allocation
of joint costs, please contact Karen Chang at
karen@perlmanandperlman.com.
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