As a donor, your commitment to transparency is vital to ensuring that your contributions make a meaningful impact. Understanding the IRS Form 990 is a crucial step in evaluating a charity's financial health and operational effectiveness. This page will guide you through the key sections of Form 990, helping you make informed decisions about your charitable giving.
By learning how to navigate this annual tax return, you’ll gain insights into a charity's program expenses, executive salaries, and potential conflicts of interest. Whether you’re a seasoned donor or new to charitable contributions, this walkthrough will equip you with the knowledge needed to verify a charity’s integrity before making your donation.
Step-by-step walkthrough
Access Form 990
Start by retrieving the charity's Form 990 from free resources like ProPublica Nonprofit Explorer or the charity’s website. This form is publicly accessible and provides detailed insights into the charity's financials.
Review Part I Summary
Focus on Part I of the Form 990, which provides a snapshot of the charity’s revenue, expenses, and net assets. This summary helps you gauge the organization’s overall financial health.
Analyze Part IX for Expenses
Navigate to Part IX, where functional expenses are broken down. Look for the percentage of funds allocated to program expenses versus administrative and fundraising costs. A target of 75% or more for program expenses is ideal.
Check Executive Compensation (Schedule J)
Examine Schedule J to understand executive salaries. Compare these figures against the charity's size and revenue to assess if the compensation is reasonable relative to mission accomplishment.
Flag Related-Party Transactions (Schedule L)
Look closely at Schedule L for any related-party transactions that may indicate potential self-dealing. A red flag here warrants further scrutiny of the charity’s governance practices.
Compare Year-over-Year Trends
Finally, review the Form 990 from previous years to identify trends in revenue, expenses, and program funding. This can inform you about the organization’s growth trajectory and overall stability.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio exceeding 75% indicates that the majority of funds are being invested in the charity’s actual mission, a good sign of effective operation.
✓ Reasonable Executive Compensation
Executive compensation that aligns with industry standards and the organization’s size reassures donors that the charity prioritizes mission over profit.
✓ Transparent Financial Reporting
A charity that is open and transparent in its financial reporting, with a detailed Form 990, demonstrates accountability and trustworthiness.
✓ Consistent Revenue Growth
Year-over-year revenue growth signals a healthy, expanding organization capable of increasing its impact in the community.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may indicate that too many resources are being funneled into administrative or fundraising costs rather than direct service.
⚠ High Executive Compensation
Excessively high executive salaries, particularly in comparison to overall revenue, may suggest misalignment of priorities within the organization.
⚠ Related-Party Transactions
Any noted related-party transactions may pose a risk for potential conflicts of interest or self-dealing, raising questions about governance and accountability.
⚠ Declining Revenue Trends
A consistent decline in revenue or program funding over several years can indicate financial instability, which could affect the charity's ability to fulfill its mission.
Tools + resources
- https://www.guidestar.org/
- https://projects.propublica.org/nonprofits/
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org/
- https://bbb.org/charity-reviews/
Miami state-level oversight
In Florida, all charities are required to register with the state Attorney General's office. For Miami residents, the Better Business Bureau (BBB) also provides charity reviews that can offer additional insights into local organizations. The Florida Association of Nonprofits can be a resource for understanding best practices and standards in the nonprofit sector, helping you verify the legitimacy of charities operating in your area.