As a thoughtful donor, it’s essential to ensure that your contributions are making a significant difference. Diving into a nonprofit's Form 990 can provide you with crucial insights regarding its financial health and operational efficiency. This page will guide you on how to read this important document, identify key areas of concern, and ensure that your chosen charity aligns with your values.
By understanding how to navigate Form 990, you'll not only validate your own philanthropic goals but also contribute to the overall transparency of the nonprofit sector. Here, we will explore the vital sections of Form 990, explain what to look for, and provide resources to help you conduct a thorough review.
Step-by-step walkthrough
Retrieve Form 990
Start by visiting ProPublica Nonprofit Explorer or the charity's website. Search for the charity's name to access its Form 990, which is publicly available and required for all 501(c)(3) organizations.
Review Part I Summary
Part I of Form 990 provides high-level financial information, including total revenue, total expenses, and net assets. Pay attention to these figures to understand the charity’s financial position.
Analyze Part IX Functional Expenses
In Part IX, you’ll find a breakdown of functional expenses by programs, admin, and fundraising. A good rule of thumb is to look for a program-expense ratio of 75% or higher, indicating efficient allocation of funds.
Check Executive Compensation (Schedule J)
Review Schedule J to see the compensation of the organization's top executives. Compare these salaries with the charity's size and revenue to assess whether they are reasonable relative to mission accomplishment.
Flag Related-Party Transactions (Schedule L)
Schedule L details any related-party transactions. Look for potential conflicts of interest or self-dealing practices that could indicate mismanagement or unethical practices.
Compare Year-Over-Year Trends
Look at the organization’s 990 filings over several years to spot trends in revenue, expenses, and program spending. Consistent growth and increased program investment can be positive indicators.
Positive signals (green flags)
✓ Strong Program-Expense Ratio
A program-expense ratio of 75% or higher signals that the charity is effectively using funds to fulfill its mission and support its beneficiaries.
✓ Transparent Executive Compensation
Executive salaries that are aligned with industry standards and clearly justified within the context of the charity's size suggest good governance.
✓ No Related-Party Transactions
Absence of related-party transactions indicates a commitment to ethical practices and transparency in operations.
✓ Consistent Growth in Programs
Year-over-year increases in program expenses demonstrate that the charity is expanding its impact and effectively addressing community needs.
Warning signals (red flags)
⚠ High Administrative Costs
If you notice that administrative and fundraising costs exceed 25% of total expenses, question how efficiently the charity is using its funds.
⚠ Excessive Executive Salaries
Salaries for executives that seem disproportionately high compared to their responsibilities and the charity's revenue can be a red flag.
⚠ Self-Dealing Transactions
Related-party transactions that benefit executives or board members may indicate a lack of transparency or ethical governance.
⚠ Diminishing Program Spending
A trend showing decreased spending on programs over time could indicate that the charity is straying from its mission.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
- https://www.afpglobal.org
Lancaster state-level oversight
In Lancaster, Pennsylvania, local charities are held accountable through the state attorney general's office, which oversees charitable organizations to ensure compliance with state laws. The Better Business Bureau (BBB) also provides reviews and ratings for charities, helping donors make informed decisions. Additionally, the Pennsylvania Association of Nonprofits offers resources and support to nonprofit organizations, fostering a culture of transparency and ethical governance in the community.