As a donor, you have every right to know how your contributions are spent. Understanding a charity's Form 990 can offer you essential insights into its financial health, governance, and how efficiently it operates. This page is designed to guide you through the process of reading a Form 990, ensuring you can make informed decisions about your charitable giving.
By learning to navigate key sections of this form, you’ll uncover critical information about the organization’s program expenditures, executive compensation, and any related-party transactions. This understanding not only empowers you as a donor but also helps you support charities that align with your values and objectives.
Step-by-step walkthrough
Access Form 990
Start by retrieving the charity's Form 990 from reliable sources like ProPublica Nonprofit Explorer, Candid GuideStar, or the charity’s own website. These forms are publicly available and provide a wealth of information about the organization.
Review Part I Summary
Begin with Part I, which summarizes the charity's mission, revenue, and expenses. This overview gives you a foundational understanding of the organization’s scope and scale.
Analyze Part IX
Look at Part IX for a detailed breakdown of functional expenses. This section distinguishes between program expenses, administrative costs, and fundraising expenses. A well-run charity should have a program-expense ratio of 75% or higher.
Check Schedule J
Examine Schedule J for information on executive compensation. Compare salaries against the charity's size and revenue to assess whether the compensation is reasonable and aligned with the organization's mission.
Inspect Schedule L
Review Schedule L for any related-party transactions. This section highlights financial dealings with board members or significant stakeholders, helping you identify potential conflicts of interest.
Compare Year-over-Year Trends
Finally, look at year-over-year data to identify any trends in growth, expenses, or revenue. This analysis can shed light on the charity's financial stability and operational effectiveness.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of 75% or higher is a positive indicator that the charity is effectively allocating resources toward its mission.
✓ Reasonable Executive Salaries
Executive compensation that aligns with the charity's size and mission suggests responsible management and transparency.
✓ No Red Flags in Related-Party Transactions
Minimal or clearly justified related-party transactions can indicate good governance practices, ensuring that organizational interests remain separate from personal interests.
✓ Consistent Growth Trajectory
Positive year-over-year increases in revenue and program expenditures often reflect a charity's successful outreach and impact, suggesting long-term sustainability.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may indicate that the charity is spending too much on administration or fundraising, raising concerns about its operational efficiency.
⚠ High Executive Compensation
Unusually high salaries for executives, especially in relation to the charity’s revenue, can suggest mismanagement or a lack of alignment with the mission.
⚠ Self-Dealing in Related-Party Transactions
If there are significant transactions with board members or insiders noted in Schedule L, this could indicate potential conflicts of interest or self-dealing practices.
⚠ Inconsistent Year-over-Year Trends
A decline in revenue or program expenditures over several years may suggest instability and could be a red flag regarding the charity’s overall health.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://www.irs.gov/app/eos
- https://www.keepersoftheland.org/
Texas state-level oversight
In Texas, you can verify a charity’s registration through the Texas Attorney General's Charitable Registry. The local Better Business Bureau (BBB) offers charity reviews to help you assess local nonprofits. Additionally, the Texas Nonprofit Alliance provides resources for understanding the landscape of nonprofits operating within the state, ensuring you support organizations that adhere to ethical standards.