As a donor, your commitment to making a positive impact is invaluable, and understanding the financial health of the charities you support is crucial. One of the primary documents that provide insight into a charity's operations is Form 990, the annual tax return for nonprofits. This publicly available document can help you assess how a charity allocates its resources and whether it aligns with your values.
This page will guide you through the essentials of navigating Form 990, focusing on key sections that reveal financial clarity, program effectiveness, and executive compensation. With this knowledge, you’ll be empowered to make informed decisions before contributing to your chosen charity.
Step-by-step walkthrough
Access Form 990
Retrieve the Form 990 from sources like Candid GuideStar, ProPublica Nonprofit Explorer, or the charity's official website. These platforms offer free access to comprehensive financial information about nonprofits.
Review Part I Summary
Start with Part I, which provides a summary of the organization's mission, revenue, and expenses. This overview helps you understand the charity's primary activities and funding sources at a glance.
Analyze Part IX Functional Expenses
Look at Part IX, which breaks down expenses into program, administrative, and fundraising costs. A well-run charity typically utilizes 75% or more of its expenses for program services, indicating effective use of donor funds.
Examine Schedule J for Executive Compensation
Check Schedule J to see the salaries of top executives. Compare these figures against the charity's size and revenue to gauge whether compensation levels are reasonable relative to mission accomplishments.
Identify Related-Party Transactions in Schedule L
Review Schedule L, which outlines any related-party transactions. Pay close attention to any self-dealing, as these can be red flags indicating potential mismanagement or conflicts of interest.
Positive signals (green flags)
✓ High Program-Expense Ratio
When a charity spends 75% or more of its expenses on programs, it is a strong indicator that they prioritize mission-focused activities, reflecting financial responsibility.
✓ Transparent Financial Reporting
A nonprofit that provides clear and consistent financial information on its Form 990 demonstrates a commitment to transparency, building donor trust.
✓ Stable or Growing Revenue
An upward trend in revenue over time can indicate a charity's increasing support and effectiveness, suggesting sustainability in its mission-driven initiatives.
✓ Robust Governance Practices
A well-structured board with diverse members and clear governance policies is a positive signal of a charity’s commitment to ethical practices and accountability.
Warning signals (red flags)
⚠ High Administrative Costs
If the charity allocates a significant portion of expenses to administration rather than programs, it may indicate inefficiency or mismanagement of resources.
⚠ Excessive Executive Compensation
A large salary for executives compared to the charity’s revenue can suggest that funds may not be used effectively towards the mission.
⚠ Frequent Related-Party Transactions
Multiple transactions involving board members or staff may indicate conflicts of interest or self-dealing, potentially jeopardizing the charity’s integrity.
⚠ Declining Program Expense Ratio
A decreasing program-expense ratio over time could signal declining effectiveness in fulfilling the charity's mission, which should raise concerns about its financial health.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
Massachusetts state-level oversight
In Massachusetts, charities must register with the Attorney General's office to operate legally. The state also provides resources through the Massachusetts Nonprofit Network, which supports transparency and accountability in the nonprofit sector. Additionally, local chapters of the Better Business Bureau (BBB) offer charity reviews and ratings to help donors make informed choices based on ethical practices and financial health.