As a donor, you deserve to understand how your contributions are utilized by the charities you support. Navigating the complexities of nonprofit financial documents can feel daunting, but with this guide, you'll learn how to read the essential Form 990, the annual tax return for nonprofits. This document provides crucial insights into a charity's financial health, program effectiveness, and governance structure.
This page will walk you through the key sections of Form 990 that matter most to informed donors. You will learn how to assess a charity’s program-expense ratio, executive compensation, and any related-party transactions. By understanding these elements, you'll be equipped to make smarter, more responsible giving decisions that align with your values.
Step-by-step walkthrough
Access Form 990
Start by retrieving the charity's Form 990 from resources like Candid GuideStar, ProPublica Nonprofit Explorer, or directly from the charity’s website. This document is publicly available and essential for assessing the organization's financial status.
Review Part I Summary
Look at Part I of Form 990, which provides a snapshot of the organization’s mission and major activities. This summary helps you understand how well the charity aligns with your values and goals.
Examine Part IX Functional Expenses
Delve into Part IX to evaluate the breakdown of functional expenses: program services, management, and fundraising. A well-run charity should ideally allocate over 75% of its expenses to program services, indicating effective use of donor funds.
Check Schedule J for Executive Compensation
In Schedule J, review the executive compensation details. Compare salaries to the charity's size and revenue. Excessive compensation may raise concerns about the charity's governance and mission focus.
Flag Related-Party Transactions in Schedule L
Look at Schedule L for related-party transactions. If the charity engages in self-dealing or has significant transactions with board members or executives, this could be a red flag regarding transparency and governance.
Positive signals (green flags)
✓ High Program Expense Ratio
A charity allocating over 75% of expenses to programs indicates a strong commitment to their mission and effective use of donor funds.
✓ Transparent Executive Compensation
Transparency in executive salaries, especially when aligned with the charity's size and revenue, reflects good governance practices and accountability.
✓ Minimal or No Related-Party Transactions
A lack of significant transactions with board members or executives suggests a commitment to ethical practices and reducing conflicts of interest.
✓ Consistent Revenue Growth
Year-over-year revenue growth signals strong donor support and effective fundraising strategies, indicating a healthy, well-managed organization.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the charity allocates less than 75% of its expenses to programs, it may indicate inefficiencies or an excessive focus on administrative costs.
⚠ High Executive Compensation
Salaries that seem disproportionately high compared to the charity's revenue can suggest mismanagement or a lack of accountability in governance.
⚠ Self-Dealing Transactions
Related-party transactions noted in Schedule L that involve substantial amounts or frequent interactions can indicate potential conflicts of interest and mismanagement.
⚠ Declining or Stagnant Revenue
If revenue trends show decline or stagnation without clear justification, it may reflect a loss of donor confidence or ineffective fundraising strategies.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.charitynavigator.org
- https://www.guidestar.org
- https://www.bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
Orlando state-level oversight
In Orlando, Florida, charitable organizations are required to register with the state Attorney General's office, ensuring accountability and compliance with state laws. Additionally, the local Better Business Bureau (BBB) offers charity reviews for nonprofits operating in the region. The Florida Nonprofit Alliance promotes best practices for nonprofits statewide, providing resources and support to enhance transparency and governance.