How do we calculate threshold revenue properly?

Start with total revenue as reported on Form 990 Line 12, including non-cash contributions, then exclude government grants for which you are required to account to the grantor for how the funds were used. It is worth documenting the calculation each year and minuting it, so the board's position is recorded: particularly in a year where you land close to the line.

Does this apply to foundation grants too?

The exclusion is written for government grants. Private foundation grants generally count toward the threshold even where they carry reporting conditions. If a large part of your funding is foundation money, the exclusion will help you much less than it helps a government-contracted organisation.

Book a scoping call using the form on this page, or call us. We will ask who is asking for the audit, when it is due, and what condition your records are in, then tell you what the preparation work involves and what it will cost before anything begins.

Nonprofit Audit Threshold

Here is a situation we have seen more than once. A board looks at Form 990, sees total revenue of $2.3 million on Line 12, concludes the organisation has crossed California's audit threshold, and commissions an audit.

Sometimes that is right. Frequently it is not.

What the statute actually says

California Government Code §12586(e) · CA Attorney General guidance

A charity that receives or accrues gross revenue of $2,000,000 or more in a fiscal year must have its financial statements audited by an independent auditor.

But government grants are excluded from that count where the nonprofit is required to account to the grantor for how the funds were used, which is the normal condition attached to a government grant.

Why this matters so much for grant-funded organisations

Consider an organisation with $2.3 million of total revenue, of which $900,000 is a county contract requiring detailed expenditure reporting. Threshold revenue is $1.4 million. No statutory audit requirement.

For heavily grant-funded organisations, the difference between Line 12 and threshold revenue is frequently the difference between needing an audit and not.

Three things to check before you assume

Your bylaws. Many impose an audit requirement independent of statute, and they govern regardless of revenue.
Your grant agreements. Funders frequently require audited statements as a condition of the award, whatever state law says.
Your lender, if you have debt. A loan covenant is a contractual obligation and does not care about §12586(e).

It cuts both ways

If you have been commissioning audits on the strength of Line 12 for several years, it is worth running the calculation properly.

And if you are below the threshold and your governing documents are silent, a review is a perfectly respectable alternative that funders generally accept: at meaningfully lower cost.

Whichever applies, the audit or review is performed by an independent firm. Wago Pop does not perform either; we prepare the books, schedules and threshold calculation that the engagement starts from.

Book a scoping call

Twenty minutes, no charge. Tell us what you need and we will tell you what it involves, what it will take, and whether we are the right fit for it.

A short call with the person who would actually do the work.

A clear scope and a fixed quote before anything begins.

We reply to every enquiry within one business day.

Prefer to talk now? Call (310) 220-0248
Monday to Friday, 9am to 6pm PT

Your nonprofit's audit threshold is not your Form 990 total revenue

What the statute actually says

Why this matters so much for grant-funded organisations

Three things to check before you assume

It cuts both ways

Keep reading

Nonprofit audits

Nonprofits

CFO for nonprofits

Common questions

Book a scoping call