As a donor, your commitment to transparency and accountability is crucial in ensuring your contributions make a meaningful impact. Understanding how to navigate a charity's Form 990 is an essential step in verifying its financial health and program effectiveness. This page will guide you through the key components of this public document, enabling you to assess potential charities more effectively.
In this guide, you'll learn how to access Form 990 through platforms like ProPublica Nonprofit Explorer and delve into its critical sections, such as program expenses, executive compensation, and related-party transactions. By becoming familiar with these details, you'll be better equipped to support organizations that align with your values and make a significant difference in your community.
Step-by-step walkthrough
Access Form 990
Visit ProPublica Nonprofit Explorer or similar platforms to find the Form 990 for the charity you want to research. Simply enter the charity's name or EIN to retrieve their financial data.
Examine Part I Summary
Review Part I for a quick overview of the charity's mission, revenue, and expenses. This will give you a foundational understanding of how funds are allocated and the charity's overall financial health.
Analyze Part IX Expenses
Look closely at Part IX, which breaks down functional expenses. A healthy program-expense ratio is over 75%, meaning the majority of funds go towards mission-driven work rather than administrative or fundraising costs.
Check Executive Compensation on Schedule J
Refer to Schedule J to evaluate executive compensation. Compare salaries to the organization's size and revenue to ensure they align with industry standards and don't overshadow mission accomplishments.
Review Schedule L for Related-Party Transactions
Investigate Schedule L for any related-party transactions. Be cautious of self-dealing or excessive transactions that could jeopardize the charity's integrity and mission.
Compare Annual Trends
By looking at multiple years' Form 990s, you can track trends in revenue, expenses, and program growth. This historical perspective is key to understanding the charity's sustainability and impact over time.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% indicates that the charity efficiently invests in its mission, ensuring your donations directly benefit the intended programs.
✓ Consistent Growth in Revenue
Year-over-year revenue growth suggests donor trust and successful fundraising efforts, which are positive indicators of a charity’s sustainability and impact.
✓ Transparent Reporting
A charity that provides detailed and transparent financial reports demonstrates accountability and a commitment to ethical practices, fostering donor confidence.
✓ Strong Board Governance
An active and diverse board of directors is crucial for good governance. Their oversight can enhance organizational integrity and decision-making, positively impacting charity operations.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may suggest that the organization prioritizes administrative costs over direct services, raising concerns about efficiency.
⚠ High Executive Salaries
Excessive compensation for executives compared to revenue and program effectiveness might indicate misalignment with the charity’s mission, impacting donor trust.
⚠ Unusual Related-Party Transactions
If Schedule L shows numerous related-party transactions, it could indicate potential self-dealing, where funds are redirected to insiders rather than the mission.
⚠ Stagnant or Declining Revenue
A lack of growth in revenue over several years could signal problems with fundraising efforts or donor confidence, which could jeopardize the charity's future.
Tools + resources
- https://www.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.afpnet.org
Chicago state-level oversight
In Chicago, Illinois, donors can rely on the state Attorney General's Charitable Registry to ensure a charity is in good standing. Additionally, the Better Business Bureau offers charity reviews, providing insights into ethical practices. The Illinois Nonprofit Association supports local nonprofits, promoting transparency and accountability within the sector. Utilizing these resources can further empower your due diligence as a donor.