Financial Glossary for Nonprofits
Running a nonprofit means navigating a financial world that's genuinely different from for-profit business — fund accounting, restricted gifts, Form 990s, and compliance rules most accountants never learned in school. Here's every term explained in plain English so you can focus on your mission, not your confusion.
31 terms organized by category
Formation & Compliance
501(c)(3) vs 501(c)(4) vs 501(c)(6)
Three different IRS tax-exempt classifications that determine what your organization can do, how it's taxed, and whether donations to it are tax-deductible.
Tax-Exempt Status
An IRS designation that allows qualifying organizations to operate without paying federal income tax on revenue related to their exempt purpose.
Form 990 / 990-EZ / 990-N
The annual tax return that most tax-exempt organizations must file with the IRS, reporting their finances, governance, and activities to the public.
Determination Letter
The official IRS letter confirming that your organization has been granted tax-exempt status — essentially your nonprofit's birth certificate.
Unrelated Business Income (UBIT)
Income your nonprofit earns from a regularly carried-on trade or business that isn't substantially related to your tax-exempt purpose — and yes, you owe taxes on it.
Public Support Test
A mathematical test that determines whether your 501(c)(3) qualifies as a public charity (broad support from many donors) or a private foundation (funded primarily by a few sources).
Charitable Solicitation Registration
A state-level registration requirement that nonprofits must complete before they can legally ask for donations in most U.S. states.
Lobbying Limits
IRS rules that restrict how much time and money a 501(c)(3) organization can spend trying to influence legislation — go too far and you risk your tax-exempt status.
Fund Accounting & Reporting
Fund Accounting
An accounting system that tracks money based on the restrictions donors and grantors place on it, rather than just tracking overall profit and loss like a for-profit business.
Restricted vs Unrestricted Funds
Unrestricted funds can be spent on anything the nonprofit needs; restricted funds must be used for the specific purpose the donor or grantor designated.
Temporarily Restricted vs Permanently Restricted
Temporarily restricted funds have restrictions that expire when a condition is met (time or purpose); permanently restricted funds must maintain their restrictions forever, with only the earnings available for use.
Net Assets
The nonprofit equivalent of equity — what's left when you subtract total liabilities from total assets, broken down by whether funds have donor restrictions.
Statement of Activities
The nonprofit equivalent of an income statement — it shows your revenues, expenses, and change in net assets over a specific period, broken down by restriction type.
Statement of Financial Position
The nonprofit equivalent of a balance sheet — it shows what your organization owns (assets), what it owes (liabilities), and what's left (net assets) at a specific point in time.
Statement of Functional Expenses
A financial statement unique to nonprofits that breaks down every expense by both its nature (salaries, rent, supplies) and its function (programs, management, fundraising).
Functional Expense Allocation
The process of dividing shared costs (like rent, utilities, and executive salaries) across your program, management, and fundraising functions based on a reasonable methodology.
Cost Allocation Plan
A formal, documented plan that describes how your nonprofit divides shared costs across programs and functions — required by most government grants and essential for audit readiness.
Audit vs Review vs Compilation
Three levels of CPA financial statement services — an audit provides the highest assurance (CPA tests everything), a review provides limited assurance (CPA does analytical procedures), and a compilation provides no assurance (CPA just organizes your numbers).
Single Audit (Uniform Guidance)
A rigorous annual audit required for nonprofits that spend $750,000 or more in federal awards in a single year, covering both financial statements and compliance with federal grant requirements.
Fundraising & Revenue
In-Kind Donations
Non-cash contributions to your nonprofit — goods, services, or use of facilities — that have measurable value and must be properly recorded in your financial statements.
Donor-Advised Fund (DAF)
A charitable giving account managed by a sponsoring organization (like Fidelity Charitable or a community foundation) where the donor gets an immediate tax deduction but recommends grants to nonprofits over time.
Grant Proposal vs Grant Report
A grant proposal asks a funder for money by describing what you plan to do; a grant report tells the funder what you actually did with the money they gave you.
Matching Gift
A corporate program where an employer matches an employee's charitable donation — effectively doubling (or sometimes tripling) the impact of the original gift.
Endowment
A permanently invested pool of money where the principal is preserved forever and only the investment earnings are used to fund the nonprofit's work — creating a sustainable, long-term revenue stream.
Fiscal Sponsorship
An arrangement where an established 501(c)(3) nonprofit legally sponsors a project or emerging organization that doesn't yet have its own tax-exempt status, allowing donors to make tax-deductible contributions.
Gift Acceptance Policy
A board-approved document that outlines what types of donations your nonprofit will (and won't) accept, and the procedures for evaluating non-standard gifts.
Board & Governance
Overhead Ratio
The percentage of your nonprofit's total spending that goes to administrative costs and fundraising rather than programs — a widely used but increasingly criticized measure of nonprofit efficiency.
Operating Reserve
Unrestricted cash (or liquid assets) set aside to sustain your nonprofit through unexpected shortfalls, emergencies, or gaps between expected revenue — typically measured in months of operating expenses.
Board Fiduciary Duty
The legal obligation of nonprofit board members to act in the organization's best interest, exercise reasonable care, and remain loyal to the mission — not to their own personal interests.
Conflict of Interest Policy
A board-approved policy requiring board members, officers, and key employees to disclose personal or financial interests that could influence — or appear to influence — their decisions on behalf of the nonprofit.
Executive Compensation (Nonprofit)
The total pay package (salary, benefits, bonuses, and perks) for a nonprofit's top leaders — which must be reasonable, well-documented, and approved through a process that avoids conflicts of interest.
Other Business Type Glossaries
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