When seeking funding through grants or contracts, small businesses and nonprofits can and should account for Indirect Costs (IDC) – expenses that support the organization as a whole but cannot be directly attributed to a specific project – if the sponsor allows.

What Are Indirect Costs?

Indirect costs are necessary for an organization’s operations but are not easily assignable to a single grant or contract. These typically include:

• Administrative salaries (e.g., executive leadership, accounting, HR)
• Rent and utilities
• IT support and infrastructure
• Equipment maintenance
• Legal and compliance services

To learn more about Indirect Costs, read 2 CFR § 200.414 on Indirect costs linked below.

The De Minimis IDC Rate: A Smart Choice for Small Businesses and Nonprofits

The de minimis indirect cost rate is a standardized rate of 15% of Modified Total Direct Costs (MTDC) as of October 1, 2024, that is available to organizations that do not have a federally negotiated indirect cost rate. This option provides a simple and efficient way to recover overhead costs.

Understanding the Modified Total Direct Cost (MTDC) Base

The Modified Total Direct Cost (MTDC) base is the expenditure amount to which the de minimis indirect cost rate is applied. It includes all direct costs except for certain exclusions specified by federal regulations. The MTDC base typically consists of:

• Salaries and wages
• Fringe benefits
• Materials and supplies
• Services
• Travel costs

However, some expenses must be excluded from the MTDC calculation, including:

• Equipment (typically defined as items costing $5,000 or more per unit)
• Capital expenditures
• Patient care costs
• Rental costs of off-site facilities
• Tuition remission
• Participant support costs
• Subawards exceeding $25,000

By applying the 15% de minimis rate to the MTDC base rather than the total award amount, organizations can ensure that only eligible direct costs are included in the calculation, leading to a fair and accurate indirect cost recovery.

Why Choose the De Minimis Rate?

For small businesses and nonprofits, managing indirect costs can be a challenge. Many organizations struggle to track and allocate these expenses effectively, leading to financial strain. Without a negotiated indirect cost rate, organizations may find themselves covering essential operational expenses out of pocket. The de minimis rate offers a straightforward solution. By allowing organizations to apply a fixed 15% to their modified total direct costs, it eliminates the need for complex cost allocation plans, reducing administrative burden and making financial management more accessible.

Additionally, this standardized approach provides stability and sustainability. Organizations can reliably recover necessary operational costs, ensuring they have the resources to cover rent, administrative salaries, and other essential expenses. Without this recovery mechanism, nonprofits and small businesses often find themselves stretching their direct funding and operational budgets too thin, which can potentially compromise their mission-driven work.

Moreover, the de minimis rate brings consistency across multiple funding sources. Many organizations juggle multiple grants and contracts, each with different reporting requirements. Using a standardized indirect cost rate simplifies financial reporting and ensures compliance, allowing organizations to focus more on their impact rather than navigating complex financial negotiations. By opting for the de minimis rate, small businesses and nonprofits gain financial predictability, transparency, and a more manageable path to long-term sustainability.

When the De Minimis Rate Cannot Be Used

While the de minimis IDC rate is a valuable option for many organizations, there are situations where it cannot be applied. Organizations should be aware of these restrictions to ensure compliance with funding requirements:

• Federally Negotiated Indirect Cost Rate: If an organization already has a federally negotiated indirect cost rate, it must use that rate rather than the de minimis rate. This ensures consistency in cost recovery across federally funded projects.
• Sponsor-Imposed IDC Restrictions: Some funding agencies or sponsors may impose their own indirect cost limitations, specifying a lower rate or disallowing indirect costs altogether. In such cases, organizations must adhere to the sponsor’s guidelines.

Organizations should carefully review grant guidelines and sponsor policies to determine whether the de minimis rate is an allowable option.

Conclusion

Understanding and accounting for indirect costs is crucial for financial sustainability. The de minimis IDC rate of 15% offers small businesses and nonprofits a streamlined, fair, and effective method for recovering operational costs, allowing them to focus on their mission without unnecessary administrative complexity.

For more budgeting guides, visit Granting Success, which is linked below. Whether you’re just beginning your journey in the research enterprise or already managing a funded project, Granting Success provides guidance throughout the entire life cycle of a sponsored activity.