How Many Nonprofits Run a Deficit
41% of US nonprofits spent more than they took in, and the rate barely moves with size. Median operating margin is 3.0%. From 255,393 Form 990 returns.
A deficit is treated in most boardrooms as a failure that needs explaining. It is worth knowing how unusual it actually is before deciding that, so we counted, across the tax returns of 255,393 charities.
41% spent more than they took in. Not in a crisis year, not in one sector. Two in five, and the rate barely moves with the size of the organization.
Where these numbers come from
The IRS publishes a free annual extract of financial data from every Form 990 it processes. Filtering the processing year 2024 file to 501(c)(3) organizations with at least $25,000 of expenses and positive revenue leaves 255,393 organizations.
A deficit here means total revenue below total functional expenses for the year, Form 990 Part VIII line 12 against Part IX line 25. Two things follow and both change how the number should be read.
It is an accrual measure, not a cash one. Depreciation is an expense and is not a payment, so an organization can post a deficit and finish the year with more money in the bank than it started with. It is also a single year measure, and one year tells you nothing about whether an organization is in trouble. A planned deficit, spending down a reserve on purpose, looks identical here to an unplanned one.
Two in five, at almost every size
| Annual expenses | Organizations | Ran a deficit | 25th percentile margin | Median margin | 75th |
|---|---|---|---|---|---|
| Under $250k | 73,991 | 36.5% | -10.2% | 8.7% | 32.1% |
| $250k to $1m | 89,491 | 44.1% | -10.6% | 1.9% | 14.9% |
| $1m to $5m | 56,502 | 42.4% | -7.8% | 2.1% | 13.4% |
| $5m to $25m | 24,286 | 40.8% | -5.2% | 1.7% | 10.3% |
| Over $25m | 11,123 | 40.3% | -3.8% | 1.3% | 7.2% |
| All filers | 255,393 | 41.0% | 3.0% |
The flatness is the finding. Between $250,000 and $25m the deficit rate moves by less than four percentage points. Scale does not protect an organization from spending more than it receives, which is not what most people assume and not what the sector’s own advice implies.
What does change with size is the margin. The typical organization above $25m operates at 1.3%, and its 25th percentile is only -3.8%. Large organizations run closer to the line in both directions, because their revenue is predictable enough to budget against and there is pressure to spend rather than accumulate.
The smallest organizations are the real exception
Organizations under $250,000 have the lowest deficit rate at 36.5% and by far the widest spread: a median margin of 8.7% and a 75th percentile of 32.1%.
A 32% margin is not prudence. At this size a single unusual gift, a bequest, or a capital appeal moves the whole year, and the organization is not so much running a surplus as receiving money it has not spent yet. The same volatility produces the -10.2% at the other end. Small organizations are not more disciplined, they are lumpier.
Do multi-year grants manufacture deficits?
The standard objection to any measure like this is that restricted grants distort it. Money arrives in one year and is spent over the next two, so the first year shows a surplus and the second shows a deficit, and neither describes anything real.
That is testable. If grant timing drives the result, organizations that depend heavily on contributions should show more deficits than those living on fees. They do not.
| Contributions as share of revenue | Organizations | Ran a deficit | 10th percentile | Median | 90th percentile |
|---|---|---|---|---|---|
| Under 25% | 78,245 | 44.8% | -39.4% | 1.4% | 27.3% |
| 25% to 50% | 27,700 | 42.2% | -33.4% | 3.2% | 33.8% |
| 50% to 75% | 32,268 | 41.8% | -35.7% | 3.8% | 39.8% |
| Over 75% | 117,163 | 38.0% | -30.0% | 4.2% | 47.6% |
The most contribution dependent organizations have the lowest deficit rate, 38.0% against 44.8% for those earning most of their money. What grant timing produces is not more deficits but more volatility: the spread between the 10th and 90th percentile widens from 66.7 points to 77.6, and the 90th percentile margin climbs to 47.6%.
So the objection is half right and points the wrong way. Lumpy grant income makes a year’s result less meaningful in both directions. It does not make deficits more common. Fee funded organizations run deficits more often, which is what you would expect of a cost base that has to be covered by earnings rather than occasionally rescued by a windfall.
What a deficit does and does not mean
It does not mean money ran out. Depreciation, which is a real expense and not a payment, sits in the expense total. An organization that owns a building will report a deficit in years when nothing went wrong.
It does not mean the year was mismanaged. Releasing a restricted grant received last year produces a deficit this year by construction, and that is the plan working, not failing. The mechanics of that release are in net assets.
It does mean something when it repeats, and this dataset cannot tell you that. One year of Form 990 data shows a snapshot. Three consecutive deficits with no reserve behind them is the pattern that closes organizations, and only your own accounts show it.
Read it next to the cash position
A deficit rate on its own is not a measure of fragility. Combined with liquidity it becomes one, so we measured both in the same organizations rather than quoting them side by side.
| Annual expenses | Organizations | Ran a deficit | Under 3 months cash | Both at once |
|---|---|---|---|---|
| Under $250k | 73,555 | 36.4% | 22.7% | 12.4% |
| $250k to $1m | 89,195 | 44.0% | 34.6% | 20.5% |
| $1m to $5m | 56,369 | 42.3% | 41.5% | 23.1% |
| $5m to $25m | 24,214 | 40.7% | 53.1% | 27.2% |
| Over $25m | 11,048 | 40.2% | 70.0% | 32.3% |
One in five organizations did both. 50,571 of them ran a deficit while holding under three months of cash, and 24,796 ran a deficit on under one month.
That one in five is not a coincidence of two separate percentages. If running a deficit and holding thin cash were independent of each other you would expect the overlap to be 14.7%. It is 19.9%, so the two travel together: the organizations spending more than they receive are disproportionately the ones with nothing behind them.
The gradient is the uncomfortable part. The overlap rises from 12.4% at the smallest organizations to 32.3% above $25m. Nearly a third of the largest charities in the country both spent more than they took in and held less than three months of cash. Deficits are flat across size and thin liquidity is not, so the combination concentrates at the top, in the institutions whose failure is least survivable for the people who depend on them.
The distribution of that buffer, and why large organizations hold so little of it, is in nonprofit cash reserves.
The practical version for one organization is to read the margin and the months of cash on the same page, every quarter, rather than either alone. Both come off the financial statements, and what else belongs beside them is in fundraising metrics.
If your organization is running one
The data changes what the conversation should be about. A deficit is not evidence that something has gone wrong, because two in five organizations have one in any given year. Three questions separate the ordinary case from the serious one, and none of them is the size of the number.
Is it explained by an accounting entry? Depreciation and the release of a restricted grant received in a previous year both produce deficits with no cash consequence. Take those out first. If what remains is small, the year was fine and the finance report should say so rather than leading with a minus sign.
Is it the second or third in a row? One year is noise at every size in this dataset. A run is not, and a run is the thing a single Form 990 cannot show you but your own accounts can. Two consecutive years of unexplained deficit is the point to act, not the point to start watching.
How many months of cash are behind it? This is the question that decides urgency, and it is the one boards ask last. An organization with eight months of cash and a 5% deficit has time to fix it. The same deficit on three weeks of cash is a different situation entirely, and the arithmetic above says roughly one in ten organizations is in the second position rather than the first.
What a board should be looking at monthly is the margin and the cash position together, on one page, with the accounting entries stripped out. The budget is where the forward version of that lives.
Limits worth stating
Full Form 990 filers only. The 990-EZ and 990-N do not carry a functional expenses statement, so organizations below those thresholds are absent. The smallest band here is not small nonprofits in general.
One year, and a mixed one. Returns processed in 2024 cover a spread of fiscal years, mostly 2022 and 2023, so this is not a single economic period and it lags the present by a year or two.
Accrual, not cash. Stated above and worth repeating, because it is the single most common misreading of a figure like this.
No sector, no geography. The extract carries an EIN and financial fields. A theatre company and a hospice of the same size sit in the same row.
Reproducing this
The IRS file is a free download and the script that produces every figure above, including the contribution reliance test, is published rather than described. The bands, the thresholds and the definition of a deficit can all be changed and rerun.
Where the money comes from in the first place, and why giving totals are a poor proxy for nonprofit income, is in how nonprofits make money. How to read any organization’s own return is in Form 990, and the forward looking version of this arithmetic is the budget.
Questions people ask
How many nonprofits run a deficit?
41% of the 255,393 organizations in this analysis reported total revenue below total expenses for the year. The rate is remarkably stable across size: 44.1% between $250,000 and $1m, and 40.3% above $25m.
Is it bad for a nonprofit to run a deficit?
Not by itself, and it is far more common than the sector's language implies. A single year deficit can be depreciation on a building, a restricted grant received last year and spent this year, or a deliberate draw on reserves. What matters is whether it repeats and whether there is a cash buffer behind it.
Can a nonprofit legally run a deficit?
Yes. There is no rule requiring a nonprofit to break even in a given year, and no tax consequence for failing to. The constraint on a nonprofit is that surplus cannot be distributed to owners, not that surplus must be zero.
What is a normal operating margin for a nonprofit?
The median across all filers is 3.0%. It falls with size, from 8.7% at organizations under $250,000 to 1.3% above $25m. The small figure at the top is not weakness, it is predictable revenue budgeted closely.
Do organizations funded by grants run more deficits?
No, and this surprised us. Organizations getting more than 75% of revenue from contributions had the lowest deficit rate at 38.0%, against 44.8% for organizations earning most of their money. Grant reliance produces wider swings in both directions rather than more deficits.
Does a deficit mean the organization ran out of money?
No. This is an accrual measure taken from the tax return, and depreciation is an expense that involves no payment. An organization can report a deficit and end the year with more cash than it started with. Months of cash on hand is the measure that answers the money question.
How do I work out my own organization's margin?
Subtract total expenses from total revenue and divide by total revenue. Both figures are on the statement of activities, and on Form 990 they are Part VIII line 12 and Part IX line 25. Read it alongside months of cash rather than on its own.
Where does this data come from?
The IRS Statistics of Income annual extract of tax-exempt organization financial data, Form 990, processing year 2024. It is a free public download and not a survey. 255,393 501(c)(3) organizations met the criteria used here.