Vendor Versus Sub-Recipient

Not-for-profit enterprises serve an organizational mission that differs from a typical business bottom line. Nevertheless, in many functions, they operate much like for-profit enterprises, with key differences. One important difference arises from the not-for-profit organization’s revenue sources, which require different considerations and financial reporting treatment. The item discussed below is not new to financial reporting for not-for-profit organizations; however, this matter must be considered whenever changes to existing grant agreements occur or a new funding source is secured. In certain circumstances, the answers are clearly defined and the appropriate response is evident, and in other situations, careful analysis and judgment are involved.

For those entities that receive federal funding, especially funding that is passed through from state and/or local agencies, determining the source of those funds and the applicable compliance requirements can be difficult. Identifying the funding as federal funding is only the first step required in considering all of the compliance requirements associated with the funding, and, ultimately reporting on that funding appropriately. A critical process that needs to be conducted is determining whether your agency has received and ultimately spends the funding in the capacity of a sub-recipient or as a vendor. Funds expended by a sub-recipient are required to be considered as federal dollars for purposes of determining the applicability of an audit conducted in accordance with OMB Circular A-133 (Single Audit), whereas funds expended in a vendor relationship are excluded. The audit process/focus and resultant cost can be significantly different where a single audit is required. While you might think the determination of a sub-recipient or vendor would be a straightforward process, actually a great deal of analysis and judgment comes into play.

Significant characteristics of a sub-recipient relationship are: Determining eligibility; program performance measured against federal program objectives; responsibility for programmatic decision-making; responsibility for compliance with federal program requirements; and using the funds to carry-out one of your organization’s programs—as opposed to providing goods or services to carry out a program of the entity from which you received the funding.

Significant characteristics of a vendor relationship are: Providing goods or services within normal business operations; providing similar goods and services within normal operations; operating in a competitive environment; providing goods or services that are ancillary to the federal program; and not being subject to compliance requirements of the federal program.

After consideration of the characteristics identified above, judgment is required to determine the appropriate classification as sub-recipient or vendor. A very important consideration is the substance of the relationship, more so than the form of the agreement. The result of your determination (vendor versus sub-recipient) will have an impact on the audit of your organization’s financial statements as well as your compliance with the requirements associated with funding you receive.

Consultation with your auditor regarding the analysis prior to the audit process can help eliminate a potentially unpleasant surprise for both parties.

Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

403(b) Universal Availability Requirements under Scrutiny by IRS
Not-for-Profit, Tax BY Preet Mann
Mandatory E-Filing of Nonprofit Tax Returns
Is Your Nonprofit Organization at Risk of Falling Into the Starvation Cycle?
Due to Feedback, IRS is Brainstorming Other Ways to Calculate the Tax on Parking
2019 Compliance Supplement
Exempt private schools offered new option to display nondiscriminatory policy

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office

One PPG Place, Suite 1700
Pittsburgh, PA 15222
p:412.261.3644     f:412.261.4876

Map of Columbus Office

65 East State Street, Suite 2000
Columbus, OH 43215
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102