As a donor, you have the right to know how your contributions are being utilized by nonprofits. Learning to read the IRS Form 990 can provide you with critical insights into a charity's financial health, governance, and operational efficiency. This page will guide you through the essential elements of Form 990, empowering you to make informed decisions.
You'll discover how to examine key sections of the form that reveal a charity's program expenses, executive salaries, and any related-party transactions. By understanding these components, you can determine if a nonprofit aligns with your values and meets your expectations for effective stewardship of charitable funds.
Step-by-step walkthrough
Retrieve Form 990
Visit ProPublica Nonprofit Explorer at projects.propublica.org/nonprofits. Enter the charity's name to find the Form 990. You can also check the charity's website or Candid GuideStar for access.
Analyze Part I Summary
This section provides an overview of the charity's mission, revenue, and expenses. Assess whether the charity's purpose aligns with your philanthropic goals.
Review Part IX: Functional Expenses
Part IX breaks down expenses into program service, administrative, and fundraising costs. A well-run nonprofit typically spends 75% or more on program services, indicating effective use of funds.
Check Schedule J: Executive Compensation
Look for executive salaries in Schedule J. Compare them to the charity's size and revenue. High salaries could be a red flag, especially if they don't correlate with mission accomplishments.
Examine Schedule L: Related-Party Transactions
Schedule L highlights any transactions between the charity and related parties. Be cautious if you spot any self-dealing, as this can compromise the charity's integrity.
Compare Year-over-Year Data
Look at trends over multiple years in Form 990. This will help identify any significant changes in expenses, revenue, or governance that could impact the charity's efficacy.
Positive signals (green flags)
✓ High program-expense ratio
A charity that spends 75% or more of its budget on programs demonstrates a commitment to achieving its mission and effectively serving its community.
✓ Reasonable executive salaries
If executive compensation aligns with industry standards and the size of the organization, it indicates responsible financial practices.
✓ Strong year-over-year growth
Consistent growth in revenue and program service can signify a charity's effectiveness and increasing community impact.
✓ Transparent governance structure
A clear and well-documented governance structure suggests a commitment to accountability and responsible management of resources.
Warning signals (red flags)
⚠ Low program expenses
If less than 75% of the charity's expenses are directed toward its programs, it may suggest inefficiency or mismanagement of funds.
⚠ High executive compensation
Salaries that appear excessive relative to the charity's size and revenue can indicate possible misalignment with the organization's mission.
⚠ Related-party transactions
If you find numerous or significant transactions with board members or executives, it could signal self-dealing, which raises ethical questions.
⚠ Lack of transparency
If the charity is reluctant to provide its Form 990 or fails to answer questions about its finances, it may suggest that something is amiss.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://apps.irs.gov/app/eos
- https://www.bbb.org/charity-reviews
Nebraska state-level oversight
In Nebraska, donors can also verify charities through the Nebraska Attorney General's Charitable Organizations Division. Additionally, check local chapters of the Better Business Bureau for reviews and ratings. The Nebraska Nonprofit Association provides resources and guidance for understanding local nonprofit operations and governance, further ensuring you make informed decisions about your charitable contributions.