• The IRS determines the primary 501(c)3 expense report rules.Donations image by Rebs O from Fotolia.com
  
  501(c)3 expense report rules apply to nonprofit, also called not-for-profit, organizations. These are charitable, religious, educational and scientific organizations as well as some others. As tax-exempt organizations, these groups cannot allocate any of their earnings to a private individual or shareholder. Nonprofit 501(c)3 expense report rules provide these organizations with the framework to ensure financial accountability.
  
  

Grants

• Many private and public grants require the organization to have the proper legal form, which may consist of a trust, association or corporation. Generally, when a not-for-profit organization accepts a grant from private or public entities, the grantee has a legal obligation to make use of the money in the manner and conditions spelled out in the not-for-profit's mission statement and the terms of the grant. The organization must adhere to federal and state laws concerning financial accounting, internal expense controls and the audit process.
  
  

Internal Control Standards

• The IRS often looks at the type of internal controls of an organization to ensure that the not-for-profit's property, cash and other assets are used for the authorized purpose. Usually, the organization makes the internal safeguards stronger by dividing the duties and responsibilities of its projects. This makes it possible for various individuals to provide some level of oversight for each component of a particular project from start to finish.
  
  

Reasonable Costs

• One of the major principles regarding 501(c) 3 expense report rules calls for "reasonable" costs. This means the expenses incurred by the person must mirror the costs a cautious individual under the same circumstances and making the same decisions would sustain. The determination of reasonableness depends on factors like the necessity of the expense given the not-for-profit's operations. It also takes into consideration ordinary business practices and state and federal regulations.
  
  

Allocable Costs

• Typically, not-for-profit organizations distribute certain costs according to the expenses incurred for a particular grant, award or activity. Sometimes the organization may allocate the expense in a ratio equivalent to the benefits received. In addition, a cost is acceptable if the organization can demonstrate how the expense contributes to the overall functioning of the organization. Legal restrictions may prohibit not-for-profits from shifting costs to other awards to make up for underfunding.
  
  

Supporting Documentation

• Expense report rules call for expenditures to have thorough documentation, including invoices, contracts and travel logs. In addition, canceled checks, activity reports and other documentation provide the necessary proof to justify expenses. The organization must not claim the same costs on other grants. If the not-for-profit treasurer questions if certain expenses meet the terms and conditions of the grant or award, he may obtain written permission in advance from the source of the funds or grant to use funds in a certain way. This ensures the not-for-profit does not violate certain terms and conditions or become embroiled in disputes concerning the items in question.