Reduced government funding, stubbornly high inflation and other macroeconomic factors have left a sizable number of nonprofits feeling financially vulnerable. It’s true that some forces are beyond your control. But thoughtful planning and tracking can provide a measure of stability. If you don’t already, consider monitoring key performance indicators (KPIs).

Why they matter

Financial decisions and planning can seem especially fraught right now. Will a misstep put your organization and its programs at risk? KPIs help establish a solid, data-driven foundation for evaluating financial options and making decisions. They provide a more up-to-date, granular and actionable snapshot than you typically can obtain from your financial statements.

Moreover, diligent KPI monitoring provides you with the flexibility to respond promptly to threats and opportunities. For example, one or more KPI can open up a clear view into your operational efficiency (or lack thereof) and tell you whether you’re well-positioned to withstand financial challenges.

And don’t forget about nonprofit watchdogs, such as Charity Navigator and Charity Watch. They incorporate KPIs and financial metrics in their ratings. So staying on top of your KPIs might sustain or improve your reviews. You can similarly use KPIs to assure stakeholders that your nonprofit is meeting their financial expectations.

Metrics to monitor

Nonprofits can choose from hundreds of potential KPIs, but some are more relevant than others. Consider tracking some or all of the following ratios:

1. Fundraising return on investment (ROI) (funds raised / fundraising expenses).

Fundraising is the lifeblood of most nonprofits. ROI shows the average dollar amount raised for each dollar spent on fundraising and can help you determine which fundraising campaigns or marketing channels are worth continuing.

Those with a ratio of at least 1.0 are generally considered cost-effective. This means you might want to discontinue fundraising strategies with lower ratios. With ROIs in hand, you can persuade your board to eliminate even cherished campaigns that might have been successful in the past but are no longer making the grade.

2. Operating reserve (unrestricted net assets / annual operating expenses).

Do you have sufficient unrestricted funds on hand to continue operating without incoming revenue? The operating reserve ratio indicates the period of time your organization could continue to pay operating expenses using reserve funds. A ratio of 0.5 says you could cover six months of expenses with your reserve. A ratio of 1.0 suggests you could go a year on reserve funding alone.

3. Current (current assets / current liabilities).

The current ratio reflects an organization’s liquidity. It measures your ability to pay short-term debt obligations (those due within the next year) with cash on hand and other current assets. A ratio of 1.0 or greater generally should be your goal.

4. Overhead (overhead expenses / total expenses).

Many donors prefer to contribute to charitable organizations that keep overhead low — the lower, the better. Executives may believe this attitude oversimplifies things (try, for example, to run a nonprofit without overhead!). Even so, it’s worth keeping an eye on overhead, particularly as individual and corporate donations become more critical to nonprofit funding.

There’s no universal target for this metric because individual organizational factors strongly influence overhead ratios. But a ratio greater than 35% could be a red flag and warrants further investigation.

5. Program expense (program expenses / total expenses).

Another donor preference is high program expense ratios. This preference is founded on the belief that higher ratios mean more dollars go directly to fulfilling an organization’s mission.

You likely want most expenses to be attributed to your nonprofit’s programs, too. But even Charity Navigator says there’s scant evidence that a program expense ratio greater than 70% leads to greater impact. Still, bear in mind that certain donors may seek out organizations with program expense ratios of at least 70%. In some circles, 85% or higher is considered prime.

Valuable insight

Financial statements will continue to play an important role in your leadership’s decision-making. But every organization can also benefit from tracking carefully selected KPIs. They provide valuable insight into what’s driving your nonprofit’s financial numbers and make it easier to identify noteworthy trends — and act on them.

How much do you know about excess benefit transactions (EBTs)? You probably understand that if your nonprofit provides financial benefits to certain people, it can result in IRS scrutiny and severe excise taxes. So you also probably have policies in place to curb or prohibit financial transactions with “disqualified persons.”

But the truth is, not every transaction between a disqualified person and a nonprofit is necessarily prohibited. If the IRS questions one of your organization’s transactions, you may be able to fight back using a rebuttable presumption.

Defining terms

EBTs are generally defined as transactions in which a nonprofit (other than a private foundation) provides a benefit to a disqualified person that exceeds the value of the consideration received in exchange for the benefit. Let’s unpack some of these terms.

In general, disqualified persons are:

• In a position to exercise substantial influence over the organization’s affairs over the past five years, such as voting board members and top management,
• Certain individuals who belong to a disqualified person’s family,
• Disqualified persons of the nonprofit’s supporting organization,
• Donors or donor advisors involved in the organization’s transaction with their donor-advised fund (DAF),
• Investment advisors to a DAF sponsoring organization, or
• Entities of which a disqualified person has a 35% or greater stake doing business with the nonprofit.

A disqualified person who engages in an EBT is liable for an excise tax equal to 25% of the excess benefit. If the transaction isn’t promptly corrected after the tax is imposed, an additional excise tax of 200% of the excess benefit is imposed. An organization manager who knowingly participates in an EBT could incur an excise tax equal to 10% of the excess benefit, up to $20,000.

Consideration received by a disqualified person might include money, property or the performance of services. Although EBTs often involve unreasonable employment compensation, other transactions may also be off-limits.

EBT transactions can range from a nonprofit paying a disqualified person’s personal expenses to agreeing to let the person use its property for personal reasons to making a loan to (or accepting a loan from) the person. Other transactions that the IRS might flag are revenue-sharing arrangements, payments to for-profit corporations owned by disqualified individuals and the transfer of assets to or from an entity controlled by a disqualified person, including loans.

Rebutting presumptions

If the IRS accuses your organization of a prohibited transaction, you may be able to establish a “rebuttable presumption” that the transaction isn’t an illegal EBT. A rebuttable presumption is a legal principle that assumes something to be true unless proven otherwise.

EBT regulations presume fair market value in arrangements involving employment compensation, property transfers and property use rights. For a transaction to qualify, your organization’s authorized body (for example, its board of directors) must be composed entirely of individuals without a conflict of interest. The authorized body needs to do three things:

1. Approve the transaction and its terms,
2. Obtain and rely on appropriate comparable data (such as an independent compensation survey) before making its determination,
3. Adequately and concurrently document the basis for its determination (including the terms and approval date).

Comparability data is particularly important. If you satisfy the above requirements, the IRS must produce significant contrary evidence about the data’s relevance to rebut the presumption. Be sure to consult your attorney about your legal position and any litigation strategies.

Obtaining adequate data

If you run a smaller nonprofit, you may worry you wouldn’t be able to obtain adequate comparability data. However, IRS regulations provide some relief to nonprofits with annual gross receipts of less than $1 million. If you qualify, your authorized body will be considered to have appropriate data if it details compensation paid for similar services by three similar organizations in your community or in communities like yours. Contact us for help with obtaining such data and for more information about avoiding potential EBTs.

Over the past year, federal government officials have threatened to revoke the tax-exempt status of various nonprofits, including universities and charities, claiming they’re politically biased. But as the American Bar Association asserts, it’s not that easy to revoke an organization’s exempt status: “With a few exceptions, IRS procedures require individual, case-by-case IRS audits of each [tax-exempt] organization, with ample opportunity for the entity to defend itself and multiple routes of appeal.”

And, in fact, most nonprofits that lose their exempt status do so not because they violate political activity or similar rules, but because they fail to file Form 990s for three consecutive years. Such automatic revocations are common, particularly with newer nonprofits. Fortunately, it’s possible to regain your status.

Regular and retroactive reinstatement

If your organization is a 501(c)(3) charity and you lose your exempt status due to an automatic revocation, you’ll need to complete Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” to regain it. Smaller nonprofits (typically organizations with $50,000 or less in annual gross receipts and $250,000 or less in assets) can use the streamlined Form 1023-EZ.

Note that unless you apply for retroactive reinstatement, your organization’s activities between the revocation and reinstatement dates will be considered taxable activities. Thus, any contributions given during that period won’t be deductible by their donors — and all income to your organization will be taxable. For this reason, you probably will want to apply for retroactive reinstatement, effective on the date of the automatic revocation. Just file the applicable form within 15 months of the date of the IRS revocation letter or the date the IRS posted your organization’s name on its website, whichever is later.

Statements and fees

When you file one of the longer forms, your organization will be required to attach a detailed statement that provides a reasonable cause for failing to file Form 990s in each of the three consecutive years. For example, perhaps your organization’s activities are substantially performed by an all-volunteer staff that isn’t knowledgeable about IRS compliance.

The statement should also describe:

• The facts that led to each individual failure,
• The facts that led to continuous failures,
• How the failures were discovered, and
• Any steps you’ve taken to avoid or mitigate them.

In addition, attach to your form: a statement that describes the safeguards and procedures put in place to avoid future failures; properly completed and executed paper tax returns for all taxable years during and after the consecutive three-year period your organization failed to file; and an original declaration dated and signed under penalties of perjury by an authorized person such as one of your nonprofit’s officers or directors. You’ll need to provide evidence to support all material aspects of the claims you make in your statements.

All organizations seeking reinstatement must pay a specified application fee. For Form 1023, it’s $600, and for Form 1023-EZ, it’s $275.

How long?

Most nonprofits that lose their tax-exempt status are anxious to restore it as soon as possible to avoid negative effects on their eligibility for donations and grants. In general, reinstatements take between three and six months when submitting Form 1023 and one to three months when using Form 1023-EZ. However, recent IRS staffing cuts and temporary government shutdowns may increase application processing times. If the IRS asks you for additional documentation, it could further delay your reinstatement date. Contact us if you’re having trouble regaining your tax-exempt status.

Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, which addresses the measurement of credit losses for short-term receivables and contract assets. This update is important for nonprofits because it simplifies how organizations apply the current expected credit loss (CECL) model. Here’s a brief summary of the ASU.

Scaling back complexity

ASU 2025-05 builds on ASU 2016-13 (Topic 326), which introduced the CECL model. Although the original version of that model improved reporting accuracy by requiring nonprofits to estimate credit losses over the life of an asset, it also added complexity for organizations responsible for making those calculations. For instance, under ASC 326, nonprofits were required to include historical loss experience, current conditions and reasonable forecasts of future economic conditions in their credit loss estimations.

ASU 2025-05 allows nonprofits to adopt a “practical expedient” when measuring credit losses. Basically, this election permits you to exclude collections received after the balance sheet date in your estimation of expected credit losses. You’ll still need to account for historical loss experience and current conditions, but you won’t have to project economic scenarios.

If you use the practical expedient, you’re also allowed to make an accounting policy election. Actual cash collections received after the end of the year (or after the balance sheet date, but before financial statements are available) can be excluded. Your nonprofit doesn’t need to record an allowance for receivables that are outstanding at the end of the year if they’re collected shortly thereafter.

Key features

Here’s an example of how ASU 2025-05 updates the CECL model: A community charity provides services on credit to low-income individuals. In the past, it might have had to calculate the potential credit loss for each invoice that goes unpaid. But under ASU 2025-05, the nonprofit can instead:

• Group similar accounts receivable based on shared characteristics such as payment history, and
• Apply a simpler, pooled approach to estimating losses.

The organization will need to disclose that it applied the expedient and accounting policy election, as well as the cutoff date for evaluating subsequent cash flows.

Notable shift

ASU 2025-05 marks a notable shift in how nonprofits account for credit losses. Be sure to update your written accounting policies to help ensure the provisions of the ASU are consistently applied. This ASU is effective for annual reporting periods beginning after December 15, 2025. Contact us with any questions or for help measuring your nonprofit’s credit losses.