Your desire to verify a charity's impact is commendable. Understanding the intricacies of a charity's Form 990 can empower you to make informed giving decisions. This annual tax return provides crucial insights into how a nonprofit operates financially, revealing its transparency and effectiveness.
On this page, we will guide you through the key sections of Form 990, highlighting important metrics such as program-expense ratios, executive compensation, and related-party transactions. By the end of this guide, you’ll be equipped to analyze a charity's financial health and governance structure effectively.
Step-by-step walkthrough
Retrieve Form 990
Visit ProPublica Nonprofit Explorer (https://projects.propublica.org/nonprofits) or a charity's website to find their Form 990. These documents are publicly available and are crucial for understanding the nonprofit’s financial health.
Examine Part I Summary
Start with Part I, the summary of the organization’s mission, revenue, and expenses. This section provides an overview of the charity’s funding sources and how much is spent on programs versus administration and fundraising.
Analyze Functional Expenses in Part IX
Look at Part IX for a breakdown of functional expenses. Ideally, a well-run charity spends 75% or more of its budget on programs. Compare the program expenses against admin and fundraising costs to gauge efficiency.
Review Executive Compensation in Schedule J
Inspect Schedule J to evaluate executive salaries. Cross-reference these salaries with the charity’s size and revenue. High compensation may raise concerns if it significantly overshadows mission-related expenditures.
Flag Related-Party Transactions in Schedule L
Check Schedule L for any related-party transactions. This section discloses relationships that may indicate self-dealing or conflicts of interest, which can be red flags for potential mismanagement.
Positive signals (green flags)
✓ High Program-Expense Ratio
A program-expense ratio above 75% indicates that the charity is committed to directing resources toward its mission and making a tangible impact in the community.
✓ Transparent Executive Compensation
If executive salaries are reasonable and justified by the size and revenue of the charity, this indicates accountability and responsible management of donor funds.
✓ Clear Board Governance Structure
A well-defined governance structure signifies that the charity is managed by an engaged board, enhancing transparency and ensuring that funds are used effectively.
✓ Consistent Growth Trajectory
A sustained upward trend in revenue and program services over multiple years signals a healthy, evolving organization that is likely to continue fulfilling its mission.
Warning signals (red flags)
⚠ Low Program-Expense Ratio
If the program-expense ratio is below 75%, it may indicate excessive spending on administrative or fundraising activities rather than direct impact, raising questions about the charity's efficiency.
⚠ High Executive Salaries
Disproportionate executive compensation relative to the charity’s revenue could be a warning sign that the organization prioritizes salaries over its mission, signaling potential mismanagement.
⚠ Self-Dealing Transactions
If Schedule L reveals self-dealing transactions, it could indicate conflicts of interest. Such transactions often suggest that funds may not be used effectively for the charity's intended purposes.
⚠ No Transparency in Governance
Lack of clarity regarding board governance and decision-making processes can be a red flag. Good governance practices help ensure accountable use of donor funds.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.candid.org
- https://www.charitynavigator.org
- https://apps.irs.gov/app/eos
- https://bbb.org/charity-reviews
- https://afpglobal.org
Kentucky state-level oversight
In Kentucky, transparency in charitable organizations is supported by resources such as the Kentucky Attorney General's Charitable Registry, where you can verify a charity’s legitimacy. The Better Business Bureau also provides charity reviews to aid your decision-making process. Additionally, the Kentucky Nonprofit Network offers information on local nonprofits, fostering a culture of transparency and accountability.