Our webinar “Spring into Stability: Exploring Cost Allocations and NICRA Amid Funding Uncertainty”, presented on April 25, 2025, reviewed practical strategies for navigating negotiated indirect cost rate agreements (NICRA) and cost allocation methods. Expanding on this webinar, we answered some of your more frequently asked questions about cost allocations, NICRA and more:
What is cost allocation?
Cost allocation is the process of identifying and recording direct costs and spreading indirect or shared expenses (like rent, insurance, or IT services) across different programs, departments, or activity centers.
Think of it like splitting a dinner bill fairly when everyone ordered a different main course but split the appetizers and wine. For nonprofits, cost allocation is important for several key reasons:
- It’s required by generally accepted accounting principles (GAAP) in the U.S. and by the IRS for financial reporting (specifically Form 990 for certain filers)
- Federal funders require documentation of a nonprofit’s cost allocation policy, and most importantly,
- It helps organizations understand the true costs of running their programs.
Beyond required grant reporting, good cost allocation practices allow nonprofits to make better management decisions while ensuring they cover their full costs when seeking funding.
What is a NICRA and how does NICRA relate to federal funding?
A NICRA (Negotiated Indirect Cost Rate Agreement) is an arrangement with the federal government for how much of your overhead costs they’ll cover when providing grants, cooperative agreements or contracts. Technically, it’s a formal agreement between a federal agency and an award recipient that reflects an agreed-upon estimate of the indirect cost rate, built on audited expenses.
To obtain a NICRA, your nonprofit must apply for one. The proposal is submitted to the federal agency responsible for negotiating and approving your organization’s NICRA, known as your federal cognizant agency. Typically, your cognizant agency will be the one that provides your nonprofit its largest dollar amount of funds.
Having a NICRA can increase your chances of federal award approval and streamline the budget process. Plus, it gives funders confidence that your organization manages financial resources effectively and allocates costs fairly. It’s particularly helpful for organizations seeking multiple federal grants, as it provides a consistent approach across different funding sources. Some costs cannot be included in the indirect cost pool for a NICRA proposal. Consult with your accounting professional and your federal agency representative for more information.
What is the de minimis rate, and can my nonprofit use it?
The “de minimis” cost rate is a simplified method for organizations to calculate and claim reimbursement for the indirect costs on federal grant awards when they don’t have a NICRA (Negotiated Indirect Cost Rate Agreement). It allows the grantee to use a predetermined percentage instead of having a full indirect cost allocation plan. The de minimis rate is 15% of Modified Total Direct Costs (MTDC), (up from 10% as of October 1, 2024.) Organizations may now use the de minimis rate even if they had a NICRA lower than 15% in the past, as long as their previous NICRA has expired or was termed by agreement.
How do I set up my accounting system for better cost allocations management?
- Start with a good foundation by creating simple and consistent account names in your chart of accounts and resisting the urge to create another account every time there’s a new program or funder.
- Utilize time-saving features within your accounting system to track expenditures by program and also by project or funder. For example, if using QuickBooks Online, use the “Track Classes” feature to create classes for your functional activities and programs. Then, track expenditures by Customer to enable you to run reports showing the revenue and related expenses by funding source.
- Create memorized reports by funding source so management can quickly monitor activity on your federal awards.
- With a well-designed system, you’ll spend less time creating reports and more time using financial information to make smart decisions about your organization’s future.
When completing the IRS Form 990, is separating the expenses important?
Yes, it is very important! Filing Form 990 is more than a routine task for nonprofits. Mistakes or omissions can trigger IRS scrutiny or even an audit.
- For 501(c)(3) and 501(c)(4) organizations, the IRS requires expenses to be broken out by function: Program, Management & General, and Fundraising (Columns A–D in Part IX). For these types of organizations, reporting all expenses in just one column (like Column A) is a red flag and does not meet IRS requirements.
- All other types of nonprofits must still complete a Statement of Functional Expenses on the Form 990, but may provide totals only. They have the option to fill in the other columns.
