When considering a donation, understanding how charities allocate their resources is crucial. A charity's Form 990 provides a wealth of information about its financial health, governance, and operational efficiency. This transparency helps donors like you make informed decisions and ensures that your contributions are used effectively to support the charity's mission.
This page will guide you through the key components of Form 990, revealing how to assess a charity's program expenses, executive compensation, and other important factors. Equipped with this knowledge, you can confidently support organizations that align with your values.
Step-by-step walkthrough
Retrieve the Form 990
Access the Form 990 of the charity you wish to examine through databases like Candid GuideStar, ProPublica Nonprofit Explorer, or directly from the charity's website. These forms are publicly available and can provide a comprehensive view of the charity's operations.
Review Part I: Summary
Start with Part I of the Form 990, which provides an overview of the charity's mission, revenue, and expenses. This section allows you to get a high-level understanding of how the organization is structured and its primary financial activities.
Analyze Part IX: Functional Expenses
Next, focus on Part IX, which breaks down the charity's expenses into program services, management, and fundraising. A well-run charity should ideally have over 75% of its expenses allocated to program services, indicating that funds are being effectively used to fulfill its mission.
Check Schedule J: Executive Compensation
Examine Schedule J to see how much the charity's executives are compensated. Compare these salaries to the charity's size and revenue to understand whether executive pay is reasonable or disproportionate to the organization's mission and financial standing.
Look for Related-Party Transactions in Schedule L
Schedule L highlights any transactions between the charity and its board members or other related parties. Be cautious of any self-dealing or excessive transactions that could indicate a lack of transparency or mismanagement.
Positive signals (green flags)
✓ High program-expense ratio
A program-expense ratio of 75% or higher indicates that the charity is successfully allocating most of its funds towards fulfilling its mission, rather than overhead costs.
✓ Transparent governance structure
An organized and well-documented board of directors, as evidenced in Form 990, shows that the charity is committed to oversight and accountability.
✓ Stable or growing revenues
Positive year-over-year revenue trends suggest that the charity is gaining donor trust and support, which can be indicative of effective program implementation.
✓ Clear mission statement
A clearly articulated mission statement in Part I of the Form 990 demonstrates that the charity has a focused purpose and sets measurable goals for its programs.
Warning signals (red flags)
⚠ High executive compensation
If executive salaries are disproportionately high compared to the charity's revenue or size, it raises questions about the charity's commitment to its mission and efficient use of donor funds.
⚠ Low program-expense ratio
A program expense ratio below 75% suggests that a significant portion of the charity's budget is spent on administrative or fundraising costs rather than directly benefiting its programs.
⚠ Related-party transactions
Frequent or substantial transactions with board members or insiders can indicate potential conflicts of interest and a lack of accountability in financial practices.
⚠ Negative year-over-year trends
Look for declining revenues or increasing expenses over time. This may signal financial instability or ineffective management, which could affect the charity's future sustainability.
Tools + resources
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org
- https://projects.propublica.org/nonprofits
- https://bbb.org/charity-reviews
- https://www.candid.org
- https://www.guidestar.org
Delaware state-level oversight
In Delaware, the Division of Charitable Solicitation within the Attorney General's office maintains a charitable registry that ensures organizations adhere to state regulations. Additionally, the Better Business Bureau (BBB) offers charity reviews to help donors understand a charity's performance. The Delaware Alliance for Nonprofit Advancement provides resources and support for local nonprofits, contributing to a culture of transparency and accountability.