What is Modified Total Direct Cost (MTDC)?

Modified Total Direct Cost (MTDC) is the cost base that many federal awards use to calculate indirect costs. If you get the base wrong, you can under-recover indirect costs or receive audit findings for charging too much.

The sections below explain what MTDC includes, what it excludes, and how to calculate it. To run the numbers for a proposal budget, use the indirect cost calculator.

What MTDC means

MTDC is the part of your direct costs that you multiply by your indirect cost rate. 2 CFR 200.1 defines MTDC as all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward.

The calculation has three parts:

• Total direct costs (TDC) are all costs you charge directly to the award.
• MTDC is TDC minus the costs that the definition excludes.
• Indirect costs equal MTDC multiplied by your indirect cost rate.

MTDC is the required base for the 15% de minimis rate, and it is the usual base for nonprofit rate agreements under Appendix IV to Part 200. Your negotiated rate agreement or award states which base you must use.

What MTDC excludes

Under 2 CFR 200.1, MTDC excludes the following costs:

• Equipment
• Capital expenditures
• Charges for patient care
• Rental costs
• Tuition remission
• Scholarships and fellowships
• Participant support costs
• The portion of each subaward over $50,000

The cognizant agency for indirect costs can approve other exclusions, but only when they are needed to avoid a serious inequity in how indirect costs are distributed.

Equipment

Under the current definition in 2 CFR 200.1, equipment is tangible personal property with a useful life of more than one year and a per-unit acquisition cost at or above the lesser of $10,000 or your capitalization level for financial statements. The 2024 definition applies to an older award only if the agency applied it, for example through an amendment or a later funding action. Check the award before you change how you classify items.

Capital expenditures

Capital expenditures include buildings, land, and improvements that materially increase the value or useful life of an asset.

Patient care

Patient care costs are the costs of medical treatment. They mostly affect research institutions and hospitals.

Rental costs

The definition excludes "rental costs" without saying which kind. Many rate agreements apply the exclusion to the rental of space, and some treat equipment rental differently. Follow the definition of the base in your rate agreement or award, and ask your cognizant agency if it is unclear.

Tuition remission, scholarships, and fellowships

Tuition remission covers tuition that an institution waives or pays for students who work on the award. Scholarships and fellowships are financial aid paid to students.

Participant support costs

Participant support costs are stipends, subsistence allowances, travel allowances, registration fees, and similar costs paid to or for participants or trainees. They do not include staff costs.

Subawards over $50,000

MTDC includes up to the first $50,000 of each subaward, regardless of the subaward's period of performance, and excludes the rest. The exclusion applies only to subawards. Contracts for services stay in MTDC as services, so you need to classify each agreement correctly under 2 CFR 200.331.

The $50,000 subaward rule

Organizations often apply the subaward rule incorrectly. For example, suppose you have a $100,000 subaward with a partner organization.

Part of the subaward	Amount	In MTDC?
First $50,000	$50,000	Yes
Remaining $50,000	$50,000	No

Only $50,000 of the subaward counts toward your MTDC base.

Apply the $50,000 limit to each subaward once, not to each budget period or year. The limit does not reset because the prime award or the subaward has more than one budget period.

MTDC calculation example

Suppose a grant has these direct costs.

Cost category	Amount
Personnel	$150,000
Fringe benefits	$45,000
Travel	$10,000
Supplies	$15,000
Equipment (one item costing $12,000, with a $10,000 capitalization level)	$12,000
Subaward to Partner A	$60,000
Subaward to Partner B	$20,000
Participant stipends	$5,000
Total direct costs	$317,000

Next, subtract the exclusions.

Item	Calculation	Adjustment
Equipment	$12,000	-$12,000
Subaward A over $50,000	$60,000 - $50,000	-$10,000
Subaward B	$20,000 (under $50,000)	$0
Participant stipends	$5,000	-$5,000
Total exclusions		-$27,000

MTDC = $317,000 - $27,000 = $290,000.

If your indirect cost rate is 15%, indirect costs = $290,000 x 15% = $43,500.

MTDC compared with other bases

Federal awards and rate agreements can use different bases.

Base	What it includes	When it is used
MTDC	TDC minus the exclusions in 2 CFR 200.1	De minimis rate and many negotiated rate agreements
TDC	All direct costs	Some rate agreements and some non-federal funders
Salaries and wages	Direct salaries and wages only	Some rate agreements
Salaries, wages, and fringe	Direct salaries, wages, and fringe benefits	Some rate agreements

Your negotiated rate agreement states which base you must use.

How to get MTDC right

Step 1: Know your exclusions

Read the MTDC definition in 2 CFR 200.1 and the base defined in your negotiated rate agreement or award. Do not add exclusions because you prefer them.

Step 2: Track subawards

Keep records of each subaward's total and of how much of it falls in the first $50,000 and how much is excluded.

Step 3: Classify equipment correctly

Track each item and your capitalization level. At a $10,000 capitalization level, a $10,000 item with a useful life of more than one year is equipment, so you exclude it. Ten separate $1,000 items are usually supplies, so they stay in MTDC. Rules for components and your award terms can change the classification.

Step 4: Separate participant costs

If you have participant support costs, record them separately from staff costs.

Step 5: Keep support for every exclusion

Auditors test MTDC calculations, so keep the support for each exclusion.

Common MTDC mistakes

Using the old $5,000 threshold automatically

The 2024 definition raised the federal equipment threshold to $10,000. The threshold you use is the lesser of $10,000 or your capitalization level, and an older award may keep the older terms.

Forgetting to include the first $50,000 of each subaward

Some organizations exclude the amount over $50,000 but forget to include the first $50,000 in the base.

Treating every rental cost the same way

The definition excludes "rental costs," and rate agreements describe the exclusion in different ways. Read your rate agreement before you decide whether a rental is excluded.

Resetting the subaward limit each year

The current definition includes up to the first $50,000 of each subaward, regardless of its period of performance. It does not provide an annual reset.

Using the wrong base

If your rate agreement uses MTDC and you apply the rate to TDC, you charge too much indirect cost, and an auditor can question the excess.

MTDC in a grant budget

When you build a grant budget, follow these steps:

1. Calculate direct costs by category.
2. Identify the exclusions and add them up.
3. Calculate MTDC as TDC minus the exclusions.
4. Apply the indirect cost rate to MTDC.
5. Calculate the total budget as TDC plus indirect costs.

The example above produces this budget:

Personnel:           $150,000
Fringe:              $45,000
Travel:              $10,000
Supplies:            $15,000
Equipment:           $12,000  [Excluded from MTDC]
Subaward A:          $60,000  [$10,000 excluded from MTDC]
Subaward B:          $20,000
Participant Support: $5,000   [Excluded from MTDC]
-----------------------------
Total Direct:        $317,000
MTDC Base:           $290,000
Indirect (15%):      $43,500
-----------------------------
Total Budget:        $360,500

De minimis rate option

If you do not have a current federally negotiated indirect cost rate, you may elect a de minimis rate of up to 15% of MTDC under 2 CFR 200.414(f).

• You apply the rate to MTDC.
• An expired negotiated rate does not stop you from electing it.
• You do not need to negotiate a rate or document your actual indirect costs to justify it. You still need records that support the base and the costs you charge, and you must charge each type of cost consistently as either direct or indirect.
• Once you elect the rate, you must use it for all federal awards until you choose to negotiate a rate.
• It can be lower than the rate you would get through negotiation.

Tools for tracking MTDC

A manual MTDC calculation is easy to get wrong. You can reduce errors with grant management software that tracks exclusions, a spreadsheet that applies the exclusion rules, or an accounting setup that flags excluded costs.

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How GrantLink supports this today

QuickBooks Online stays your accounting record. On each grant, you link Expenses to the QuickBooks Online Customers, Projects, Locations, or Classes that hold the grant's costs, and GrantLink includes costs assigned to those records in the grant. You can allocate other transactions from the Ledger or manually. On the grant's Budget > Indirect costs page, you can enter an Indirect Cost Rate (%) and an Indirect Cost Cap, and then calculate indirect costs by period. See Running Indirect Cost Calculations.

To create a report, open Chats > New chat. Reports for a grant are listed on the grant's Reporting > Reports page. Allocating a transaction in GrantLink does not change QuickBooks Online.

Sources: current 2 CFR 200.1 (MTDC and equipment definitions), 2 CFR 200.414 (indirect costs and the de minimis rate), and the 2024 final guidance and effective date notice.