As a donor, you have every right to scrutinize where your contributions end up. Understanding a charity's financial health is essential to making informed decisions. A vital resource for this verification is the charity's Form 990, an annual tax return that reveals key financial details about its operations.
This page will guide you through reading Form 990, highlighting the important sections such as program expenses, executive compensation, and related-party transactions. By learning how to interpret these figures, you’ll enhance your ability to ensure your donations are making a meaningful impact.
Step-by-step walkthrough
Access Form 990
Retrieve the charity's Form 990 from resources like Candid GuideStar or ProPublica Nonprofit Explorer. Simply enter the charity’s name or EIN, and you can access this crucial document for free.
Review Part I Summary
Begin with Part I, which gives a snapshot of the charity's revenue, expenses, and net assets. This summary helps you understand the organization’s financial standing at a glance.
Examine Part IX for Expenses
Navigate to Part IX to see the breakdown of functional expenses. Look for the program expenses, administrative costs, and fundraising expenses. A healthy program-expense ratio should be 75% or higher.
Check Executive Compensation (Schedule J)
Access Schedule J to review executive salaries. Compare these figures against the charity's size and revenue. High salaries relative to mission accomplishment may raise concerns.
Flag Related-Party Transactions (Schedule L)
Look at Schedule L for any related-party transactions. These could indicate potential conflicts of interest or self-dealing, which are red flags in charity governance.
Assess Trends Year-over-Year
Finally, compare the current year's Form 990 with prior years. Look for trends in revenue, program expenses, and governance structure to assess the charity's growth and stability.
Positive signals (green flags)
✓ Strong Program-Expense Ratio
A program-expense ratio of 75% or higher signals that the charity prioritizes its mission and allocates funds effectively towards its programs.
✓ Transparent Governance Structure
If the charity has a well-defined governance structure and indicates board diversity and expertise, it typically reflects a commitment to ethical practices.
✓ Consistent Growth
A steady increase in revenue over the years suggests that the charity is effective and trusted by its community, thus enhancing its capacity to deliver on its mission.
✓ Diverse Funding Sources
Having multiple major donors or grantmakers indicates financial stability. It reduces dependence on a single funding source and showcases broad support for the charity.
Warning signals (red flags)
⚠ Low Program-Expense Ratio
If the program-expense ratio is below 75%, this may suggest that the charity allocates too much of its budget to administrative or fundraising costs, rather than directly to its mission.
⚠ High Executive Salaries
Executive compensation that seems excessive compared to the charity's overall revenue can be a red flag. Ensure that the salaries align with the organization's size and mission fulfillment.
⚠ Related-Party Transactions
If there are numerous related-party transactions on Schedule L, it may indicate potential conflicts of interest. This could affect the charity's transparency and accountability.
⚠ Declining Revenue or Growth
A consistent decline in revenue or stagnation in growth over the years can indicate financial instability. This could limit the charity's ability to fulfill its mission effectively.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://www.afpglobal.org
Oregon state-level oversight
In Oregon, the Attorney General's office oversees charitable organizations and maintains a registry of registered charities. You can check the registration status of a charity through the Oregon Department of Justice's website. Additionally, local resources like the Better Business Bureau provide charity reviews to further educate donors on transparency and accountability.