As a donor, understanding where your contributions go is crucial to ensuring your generosity makes a measurable impact. One invaluable resource for verifying a charity’s legitimacy is its Form 990, a nonprofit’s annual tax return. Reading this document can provide insight into a charity’s finances, programs, and governance structure. By learning how to navigate this form, you can make informed decisions about your charitable contributions.
This page will guide you through the essential components of Form 990, including where to find it, how to interpret its various sections, and what red flags to watch out for. Armed with this knowledge, you can enhance your due diligence and support organizations that align with your values.
Step-by-step walkthrough
Retrieve Form 990
Visit Candid GuideStar, ProPublica Nonprofit Explorer, or the charity’s website to access Form 990. Simply enter the charity's name to find their tax return and download it.
Read Part I Summary
Part I offers an overview of the charity's mission, programs, and key financial data. Look for the program expenses relative to total expenses as it gives insight into how much is spent on charitable activities.
Analyze Part IX Functional Expenses
Part IX breaks down expenses into program, administrative, and fundraising costs. A well-run charity typically spends over 75% of its budget on programs, indicating effective use of donor funds.
Check Executive Compensation in Schedule J
Schedule J details how much executives are compensated. Compare these figures to the charity’s size and revenue to assess if the salary is appropriate and not excessive.
Flag Related-Party Transactions in Schedule L
Schedule L reveals any transactions with board members or executives. If you see significant payments or transactions, consider that a warning sign of potential self-dealing.
Compare Year-Over-Year Trends
Look at multiple years of Form 990s to identify trends in income, expenses, and program effectiveness. Consistent growth and spending on programs suggest a stable and effective charity.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% is a positive indicator, showing that the charity prioritizes its mission and effectively uses donor funds to support its programs.
✓ Reasonable Executive Salaries
If executive compensation aligns with industry standards and is proportionate to the organization’s size and revenue, it suggests responsible financial management.
✓ Stable or Growing Revenue
Consistent revenue growth over the years, particularly if it supports program expansion, indicates a thriving organization that is successfully attracting donors and grants.
✓ Transparent Governance Structure
A well-defined board governance structure, along with clear policies documented in the Form 990, signals a commitment to ethical practices and accountability.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may indicate that the charity is spending too much on administrative costs or fundraising, potentially lowering the impact of donor contributions.
⚠ High Executive Compensation
Significantly high salaries for executives compared to the charity's size and revenue can be a red flag, suggesting mismanagement of funds or a misalignment of priorities.
⚠ Frequent Related-Party Transactions
If Schedule L reveals many transactions involving board members or executives, it may indicate potential conflicts of interest or self-dealing practices that could undermine trust.
⚠ Declining Revenue or Growth
A downward trend in revenue or program expenditures over consecutive years can signal financial instability, which may jeopardize the charity's mission.
Tools + resources
- https://www.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.irs.gov/app/eos
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://www.afpnet.org
New Haven state-level oversight
In Connecticut, the state Attorney General’s office oversees charitable organizations, ensuring compliance with state laws. Local resources such as the Better Business Bureau (BBB) provide additional charity reviews specific to New Haven. Additionally, the Connecticut Association of Nonprofits offers support and information for both donors and nonprofits, promoting transparency and accountability.
FAQ
What is Form 990?
Where can I find a charity's Form 990?
How do I assess a charity's financial health?
What does a high program expense ratio indicate?
Why is executive compensation important to review?
What are related-party transactions?
How can I compare charities effectively?
Other donor-verification guides
Armed with the knowledge of how to read Form 990, you have the power to verify the legitimacy of charities before donating. Use this guide to conduct your due diligence, ensuring your contributions will make a meaningful impact and support organizations dedicated to their missions.