As a generous donor, ensuring your contributions are utilized effectively is crucial. Understanding how to read a charity's Form 990 can empower you to make informed decisions. This page provides a comprehensive guide to navigating this important financial document.
Form 990, the annual tax return for nonprofits, reveals essential information about an organization’s financial health, operational priorities, and governance structure. By learning how to dissect this form, you can gain valuable insights into a charity's effectiveness and alignment with your values.
Step-by-step walkthrough
Access Form 990
Retrieve the charity's Form 990 from sites like ProPublica Nonprofit Explorer or Candid GuideStar. This document is public and provides a wealth of information about the charity’s finances and operations.
Review Part I Summary
Start with Part I, which offers a snapshot of the charity’s mission, programs, and financial data including total revenue and expenses. This section sets the context for understanding the charity's activities.
Analyze Part IX Functional Expenses
Look closely at Part IX, which breaks down expenses into program, administration, and fundraising costs. A healthy program-expense ratio should exceed 75%, indicating that the charity primarily invests in its mission.
Check Executive Compensation (Schedule J)
Schedule J details the compensation of top executives. Compare these salaries to the charity's overall size and revenue to assess whether compensation aligns with mission accomplishment.
Flag Related-Party Transactions (Schedule L)
Examine Schedule L for any related-party transactions. These may signal potential conflicts of interest or self-dealing, which merit further consideration.
Compare Year-Over-Year Trends
Finally, analyze the charity’s Form 990 over several years. Look for trends in revenue, expenses, and program funding to gauge growth and sustainability.
Positive signals (green flags)
✓ High Program-Expense Ratio
A program-expense ratio above 75% is a positive sign, indicating that the majority of funds are being used to support the charity's mission as opposed to administrative costs.
✓ Transparent Reporting
A charity that provides detailed and transparent financial reporting is often more trustworthy and committed to accountability.
✓ Stable Revenue Growth
Consistent revenue growth year-over-year suggests the charity is effectively engaging donors and expanding its impact.
✓ Strong Governance Structure
An outlined governance structure, including a diverse and active board of directors, indicates that the charity is well-managed and accountable to its stakeholders.
Warning signals (red flags)
⚠ Low Program-Expense Ratio
A program-expense ratio below 75% indicates that a charity might be spending too much on administrative and fundraising costs, rather than directly on its mission.
⚠ High Executive Salaries
If executive compensation is disproportionately high compared to the charity’s revenue and mission impact, it may raise concerns about the organization’s priorities.
⚠ Frequent Related-Party Transactions
Regular related-party transactions can suggest self-dealing or conflicts of interest, which could undermine the charity's credibility and trustworthiness.
⚠ Stagnant or Declining Revenue
A lack of revenue growth can be a red flag for the charity’s sustainability and ability to continue providing services effectively.
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/charities
- https://www.oklahomacity.gov/departments/finance/charity-registries
Oklahoma state-level oversight
In Oklahoma, you have additional resources to verify charity legitimacy. The Oklahoma Attorney General’s office maintains a charitable registry, ensuring transparency in charitable organizations. Additionally, the Better Business Bureau (BBB) provides charity reviews, helping you assess nonprofit performance locally. Engaging with local nonprofit associations can also offer insights into reputable organizations in your area.