As a donor, your desire for clarity and accountability in charitable organizations is commendable. Understanding how to read a Charity Form 990 is vital for verifying a charity's financial health and its commitment to its mission. This page will guide you through the essential elements of the Form 990, helping you make informed decisions about your contributions.
In the following sections, we’ll outline how to retrieve the Form 990 from various sources, review key sections that matter most for transparency, and highlight red flags to watch for. By the end of this guide, you will feel empowered to assess any charity's financial practices and mission alignment.
Step-by-step walkthrough
Retrieve the Form 990
Start by locating the charity's Form 990, which can be found on platforms like ProPublica Nonprofit Explorer or Candid GuideStar. Simply enter the charity's name, and navigate to the form to begin your assessment.
Review Part I: Summary
Part I provides a snapshot of the charity’s mission, revenue, and expenses. Pay attention to the total revenue compared to total expenses to get an initial sense of financial health.
Analyze Part IX: Functional Expenses
This section breaks down how funds are spent across programs, administration, and fundraising. A well-run charity should ideally have at least 75% of its expenses going toward programs.
Check Schedule J: Executive Compensation
Schedule J outlines compensation for top executives. Compare salaries against the charity’s size and revenue to ensure they align with expectations for similar organizations.
Flag Related-Party Transactions in Schedule L
Here, you'll find any transactions with board members or major stakeholders. Be cautious of excessive self-dealing, which can signal potential financial mismanagement.
Compare Year-Over-Year Trends
Look for trends over time in expenses, revenue, and program funding. Consistent growth in program expenses while maintaining low administrative costs is a positive indicator.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% indicates that the charity is effectively investing in its mission, prioritizing direct community impact.
✓ Reasonable Executive Salaries
If executive compensation is in line with industry standards and the charity's size, it reflects responsible governance and appropriate resource allocation.
✓ Transparency in Related-Party Transactions
Clear, disclosed related-party transactions show accountability and that the charity is operating with transparency in financial dealings.
✓ Consistent Growth in Program Funding
Year-over-year growth in program expenses is a strong indicator of a charity’s commitment to its mission and effective use of donor funds.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If a charity reports less than 75% of its expenses going toward programs, it may indicate mismanagement or a focus on fundraising over mission.
⚠ High Executive Compensation
Excessive salaries for top executives compared to the charity’s revenue can raise questions about priorities and whether funds are used effectively for the mission.
⚠ Frequent Related-Party Transactions
A high number of transactions with board members or related parties may suggest conflicts of interest or self-dealing practices that could harm the charity's integrity.
⚠ Declining Program Funding Over Time
If program expenses are decreasing year-over-year while administrative and fundraising costs increase, this trend can signal a shift away from mission-focused activities.
Tools + resources
- https://projects.propublica.org/nonprofits/
- https://www.guidestar.org/
- https://bbb.org/charity-reviews/
- https://www.charitynavigator.org/
- https://apps.irs.gov/app/eos
Fresno state-level oversight
In Fresno, California, donors can also refer to the California Attorney General's charitable registry for additional transparency on local charities. Additionally, consider checking the Better Business Bureau for charity reviews and evaluations. The California Association of Nonprofits provides resources and support for nonprofits, ensuring accountability and promoting best practices in charity governance.
FAQ
What is Form 990?
Where can I find a charity's Form 990?
Why is the program expense ratio important?
How do I assess executive compensation?
What should I be cautious about in related-party transactions?
How often should I check a charity's Form 990?
Can I find previous years' Form 990s?
Other donor-verification guides
As a proactive donor, you have the power to ensure your contributions are making a meaningful impact. By reviewing the Form 990, you can confirm that charities are using funds responsibly and effectively. Equip yourself with this knowledge, and make informed decisions that align with your values and philanthropic goals.