As a donor, it's essential to know that your contributions have a meaningful impact. One way to ensure your chosen charity uses funds responsibly is by understanding their Form 990, the annual tax return for nonprofits. This document offers a detailed look into a charity’s financial health and performance.
This page will guide you on how to access and interpret essential sections of Form 990, including program expenses, executive compensation, and related-party transactions, helping you verify that your donation aligns with your values.
Step-by-step walkthrough
Retrieve Form 990
Go to ProPublica Nonprofit Explorer (projects.propublica.org/nonprofits) or Candid GuideStar (www.guidestar.org) to find the charity's Form 990. It's a publicly available document that provides crucial financial information.
Review Part I Summary
Start by reading Part I of Form 990, which summarizes the charity’s mission, key programs, and overall financial data. This section gives you a broad overview of how the charity operates.
Analyze Part IX Functional Expenses
Examine Part IX to assess how expenses are allocated. A well-run charity should ideally direct more than 75% of its expenses toward program services, rather than administration or fundraising.
Check Schedule J for Executive Compensation
Look at Schedule J to evaluate executive compensation. Compare salaries to the charity’s size and revenue to understand if the compensation aligns with the mission and financial health of the organization.
Inspect Schedule L for Related-Party Transactions
Review Schedule L to identify any related-party transactions. Be cautious if significant transactions are made with board members or executives, as this could indicate potential self-dealing.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of over 75% suggests that the charity effectively allocates its resources to directly support its mission, making it a credible organization.
✓ Transparent Executive Compensation
If executive compensation is modest and justifiable within the context of the charity’s revenue, it indicates responsible financial management and commitment to the mission.
✓ Engaging Programs and Growth
Consistent growth in revenue and program services over multiple years indicates a healthy charity that is effectively serving its community and fulfilling its mission.
✓ Strong Governance Structures
A well-structured board governance with diverse skills and backgrounds is a sign of a responsible and ethically-managed charity, promoting accountability and transparency.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, this may indicate that the charity is spending too much on administrative or fundraising costs rather than directly benefiting its cause.
⚠ Excessive Executive Compensation
High salaries in comparison to the charity's revenue or size can raise red flags. It may suggest that funds are not being used effectively to support the organization’s mission.
⚠ Self-Dealing in Schedule L
Any significant related-party transactions should be scrutinized. If the charity engages in business with its executives or board members, it could be a sign of unethical practices.
⚠ Declining Revenue or Services
Watch for declining revenue and program services year-over-year. This could indicate financial instability or ineffective programming, which could impact the charity’s sustainability.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
North Dakota state-level oversight
In North Dakota, you can access additional resources to verify charities. The North Dakota Attorney General's Office maintains a charitable organization registry where you can find licensed charities. Additionally, the local Better Business Bureau provides charity reviews and ratings, ensuring that you are informed about the charities you support.
FAQ
What is Form 990?
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What should I look for in Form 990?
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What are related-party transactions?
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What if I find red flags?
Other donor-verification guides
Informed giving starts with your proactive research. By understanding and analyzing Form 990, you empower yourself to make donation decisions that align with your values and the charities you support. Take the time to verify a charity's financial health before contributing, ensuring your generosity has the greatest impact.