Donors like you are right to seek transparency when considering charitable contributions. Understanding the financial health and operational efficiency of a nonprofit organization is crucial for making informed giving decisions. One of the best resources at your disposal is Form 990, the annual tax return that nonprofits must file with the IRS. This form lays bare a charity's financial and operational data, allowing you to see how your potential donations will be utilized.
In this guide, we’ll walk you through how to read Form 990, highlighting key sections that provide insight into a charity’s mission, financial practices, and governance. By understanding what to look for, you can ensure your donations support organizations that align with your values and goals.
Step-by-step walkthrough
Retrieve Form 990
Access the Form 990 for the charity you are investigating. You can find it on platforms like Candid GuideStar, ProPublica Nonprofit Explorer, or directly on the charity's website. Simply search for the organization by name or EIN to find their most recent filings.
Check Part I Summary
Begin with Part I of Form 990, which provides a snapshot of the charity’s mission, activities, and financial performance. Look for the total revenue and total expenses, which give a broad overview of how the organization operates.
Analyze Part IX: Functional Expenses
Review Part IX to see how the charity allocates its expenses among programs, administration, and fundraising. A well-run nonprofit typically spends at least 75% on program services. Compare these ratios to industry standards.
Review Schedule J: Executive Compensation
In Schedule J, assess the compensation of key executives. Compare their salaries against the charity's size and revenue to ensure they are reasonable and justifiable in context of the organization’s mission.
Flag Related-Party Transactions
Examine Schedule L for any related-party transactions, which could indicate potential conflicts of interest. If these transactions exist, consider how they may affect the charity’s operations and transparency.
Compare Year-over-Year Trends
For a deeper understanding, compare the most recent Form 990 with previous years. Look for trends in program spending, revenues, and executive compensation to assess the charity's growth trajectory and stability.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of 75% or higher demonstrates that the charity is effectively using its funds for mission-related activities, indicating solid operational practices.
✓ Transparent Executive Compensation
Reasonable compensation for executives, aligned with industry standards, shows that the charity values transparency and is not overpaying its leadership.
✓ No Related-Party Transactions
The absence of related-party transactions on Schedule L suggests a clear separation of personal interests from organizational decisions, indicating strong governance.
✓ Consistent Revenue Growth
A steady increase in revenue and program expenses over the years points to a healthy and growing organization that can continue to fulfill its mission effectively.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the charity spends less than 75% of its budget on program services, it may suggest inefficiency or a focus on administrative overhead instead of mission-driven activities.
⚠ High Executive Compensation
Excessive salaries for executives compared to the charity’s revenue might indicate mismanagement or prioritization of leadership over the mission, which could be a warning sign.
⚠ Related-Party Transactions
If there are numerous related-party transactions on Schedule L, it raises concerns of potential conflicts of interest or self-dealing that could undermine the charity’s integrity.
⚠ Inconsistent Revenue Growth
A significant drop in revenue or program expenses over several years could indicate financial instability or a declining ability to fulfill the charity’s mission.
Tools + resources
- https://www.guidestar.org
- https://projects.propublica.org/nonprofits
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://www.afpglobal.org
St. Paul state-level oversight
In St. Paul, Minnesota, the state Attorney General's office maintains a charitable registration database that can help you verify the legitimacy of nonprofits. Additionally, the Better Business Bureau (BBB) provides charity evaluations that may assist in your research. Consider checking the Minnesota Council of Nonprofits for resources on nonprofit governance and accountability to ensure your chosen charity aligns with your values.