As a thoughtful donor, taking the time to understand how charities utilize your contributions is crucial. One of the best resources at your disposal is the IRS Form 990, an annual tax return that nonprofit organizations are required to file. This form provides a comprehensive overview of a charity's financial health, including how funds are allocated across various functions.
This page will guide you through key sections of Form 990, detailing how to interpret the financial data it presents. By learning to navigate this document, you'll be equipped to make informed decisions about your charitable contributions, ensuring your support goes to organizations that are committed to their mission and responsibly managing their resources.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 through ProPublica Nonprofit Explorer (projects.propublica.org/nonprofits) or the charity's own website. This form is a vital resource that discloses financial and operational details pertinent to your evaluation.
Review Part I Summary
Check Part I for a snapshot of the charity's mission, revenue, and expenses. This section provides a summary understanding of how funds are generated and spent, giving context for deeper analysis.
Analyze Part IX Functional Expenses
Examine Part IX to see how the charity allocates its resources. Look for the program expense ratio, aiming for at least 75% allocated toward programs, which indicates effective use of donations.
Check Schedule J for Executive Compensation
Review Schedule J to compare executive salaries against the charity's revenue and size. High salaries relative to total income may raise questions about financial priorities and mission focus.
Investigate Schedule L for Related-Party Transactions
Evaluate Schedule L for any related-party transactions that could indicate potential conflicts of interest. Such transactions can be a red flag if they suggest self-dealing rather than a genuine mission-driven focus.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of 75% or more indicates that a charity is effectively channeling donations into its mission-driven programs, which is a positive indicator for potential donors.
✓ Transparent Reporting
Charities that provide detailed and clear Form 990 filings, including thorough notes and explanations, demonstrate a commitment to transparency and accountability to their donors.
✓ Consistent Growth
A consistent increase in revenue and program expenses year over year suggests a successful charity that is expanding its reach and impact within the community.
✓ Strong Board Governance
Robust governance structures and independent board members indicate that the charity is well-managed and committed to its mission, which builds donor confidence.
Warning signals (red flags)
⚠ High Executive Salaries
If executive compensation appears excessively high compared to the charity's revenue, this could signal misaligned priorities and a lack of focus on mission accomplishment.
⚠ Low Program Expense Ratio
A program expense ratio below 75% may indicate that a charity is spending too much on administrative and fundraising costs rather than on actual programs that benefit their cause.
⚠ Self-Dealing Transactions
Related-party transactions listed in Schedule L can pose potential conflicts of interest or self-dealing. Be cautious if these transactions are frequent or significant.
⚠ Unstable Growth Trajectory
Review year-over-year changes in revenue and expenses. A declining trend might suggest financial instability or ineffective programming, raising questions about the charity's sustainability.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.charitynavigator.org
- https://apps.irs.gov/app/eos
- https://www.bbb.org/charity-reviews
- https://www.afpglobal.org
- https://www.case.org
Raleigh state-level oversight
In Raleigh, North Carolina, the state Attorney General's office maintains an up-to-date charitable registry, which can be an additional resource for verifying the legitimacy of local charities. Additionally, the Better Business Bureau (BBB) offers charity reviews to assess nonprofit accountability and transparency. Local groups, such as the North Carolina Center for Nonprofits, also provide educational resources for donors looking to engage responsibly with charitable organizations.