The De Minimis Indirect Cost Rate: What It Covers, What It Excludes, and When to Negotiate Instead

The short answer. Any organization that has never held a federally negotiated indirect cost rate may charge indirect costs to a federal award at a de minimis rate of up to 15 percent of modified total direct costs (2 CFR 200.414(f)). The election requires no application, no approval, and no supporting proposal. It does require an understanding of what “modified total direct costs” includes, because the base, not the percentage, is where most organizations lose money.

What changed in 2024

Before October 1, 2024, the de minimis rate was 10 percent. The 2024 revision of the Uniform Guidance raised it to 15 percent and made two related changes to the base. The portion of each subaward that may be included in the base rose from $25,000 to $50,000, and the equipment threshold rose from $5,000 to $10,000, which means more purchases now count as supplies and therefore remain in the base.

For an organization spending $600,000 in direct costs on a federal award, the difference between the old rate and the new one is $30,000 a year. That is the cost of not having reread the regulation.

What “modified total direct costs” means

The base is defined at 2 CFR 200.1. It includes direct salaries and wages, fringe benefits, materials and supplies, services, travel, and the first $50,000 of each subaward. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000.

Two of those exclusions catch nonprofits regularly.

The first is rent. An organization that budgets $40,000 in occupancy as a direct cost cannot apply the de minimis rate to it. If the same organization treats occupancy as an indirect cost, it is recovered through the rate and not charged directly. Either approach is permissible; charging rent directly and then applying 15 percent on top of it is not.

The second is participant support costs. Stipends, travel allowances, and registration fees paid to or on behalf of program participants are excluded from the base. A workforce program with $150,000 in participant stipends will find that its allowable indirect recovery is substantially smaller than a first reading of the budget suggests.

When the de minimis rate is the wrong choice

The de minimis rate is a floor, not a ceiling. An organization whose actual indirect cost rate, properly calculated, is 22 percent leaves seven points of legitimate recovery on the table by electing 15 percent. Whether that is worth the effort of negotiating a rate depends on volume.

Our rule of thumb: if federal direct costs exceed roughly $1 million a year and the organization’s true indirect rate is more than five points above 15 percent, a negotiated rate will pay for the cost of preparing the proposal within the first year. Below that volume, the de minimis election is usually the better decision.

A negotiated indirect cost rate agreement, commonly called a NICRA, is issued by the organization’s cognizant agency, which is generally the federal agency providing the largest share of direct funding. The proposal requires audited financial statements, a cost allocation methodology, and a reconciliation of the indirect cost pool to the financial statements. The process takes between three and nine months depending on the agency.

Two rules that apply either way

First, the election is organization-wide. An organization may not use the de minimis rate on one federal award and a negotiated rate on another (2 CFR 200.414(f)). Once a negotiated rate is in place, it must be used on all federal awards that permit indirect cost recovery.

Second, pass-through entities must honor the rate. A state agency or county that subawards federal funds to a nonprofit must accept either the nonprofit’s negotiated rate or its de minimis election (2 CFR 200.332(b)(4)). A pass-through entity that caps indirect costs below the federal rate without statutory authority is out of compliance, and the subrecipient is entitled to raise the point.

What we recommend

Organizations that have never made an election should make it deliberately, in writing, in their cost allocation policy, and should recalculate the base annually. Organizations already on the de minimis rate should confirm that their current awards reflect 15 percent rather than the pre-2024 figure; the new rate applies to awards issued on or after October 1, 2024, and to earlier awards only where the awarding agency has amended the terms.

Regulatory references: 2 CFR 200.1 (definitions of “modified total direct costs,” “equipment,” and “participant support costs”); 2 CFR 200.414(f) (de minimis rate); 2 CFR 200.332(b)(4) (pass-through entity obligations); 2 CFR 200.414(c)(1) (acceptance of negotiated rates); Appendix IV to Part 200 (indirect cost proposals for nonprofit organizations).

This article is general information about federal grant administration. It is not legal or accounting advice, and it does not account for agency-specific terms and conditions that may apply to a particular award.