As a thoughtful donor, you want to ensure that your contributions are making a meaningful impact. Understanding a charity's financial health and operational transparency is essential for informed giving. One of the best tools for this is the IRS Form 990, which provides a wealth of information about nonprofit organizations' finances and activities.
This page will guide you through how to read Form 990, focusing on key sections that reveal vital insights about a charity’s spending, governance, and mission alignment. We’ll walk you through where to find these documents and what to look for to make sure your donations are used effectively.
Step-by-step walkthrough
Retrieve Form 990
Access the IRS Form 990 for your chosen charity through platforms like Candid GuideStar, ProPublica Nonprofit Explorer, or directly from the charity's website. These forms are publicly available and provide crucial financial information.
Review Part I Summary
Start with Part I, which summarizes the charity's mission, revenue, and expenses. This section provides a high-level overview of the organization’s financial activities and can help you assess if their goals align with your values.
Analyze Part IX Functional Expenses
Part IX breaks down expenses into categories like program, administrative, and fundraising costs. A well-run charity should spend 75% or more on program expenses, indicating that funds are being used effectively to fulfill their mission.
Evaluate Executive Compensation (Schedule J)
In Schedule J, you can find information on executive salaries. Compare these figures to the charity's size and revenue. High salaries may be a concern if they seem excessive compared to the charity's mission accomplishments.
Check Related-Party Transactions (Schedule L)
Look at Schedule L for any related-party transactions. These could indicate conflicts of interest or self-dealing. Such transactions should be flagged for further investigation to ensure that they do not undermine the charity's integrity.
Positive signals (green flags)
✓ High Program Expense Ratio
A charity that spends 75% or more on programs indicates a strong commitment to its mission and effective fund utilization, suggesting that your donation will be impactful.
✓ Transparent Governance
A charity with well-defined governance, as indicated by a diverse and engaged board, shows a dedication to accountability and ethical practices.
✓ Growth in Program Revenue
Consistent growth in program revenue over the years indicates a successful outreach and effective fundraising, reflecting positively on the viability of the charity.
✓ Low Executive Compensation Relative to Size
When executive salaries are reasonable for the charity's size and revenue, it suggests that the organization prioritizes its mission over inflated pay.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If a charity spends less than 75% of its budget on programs, it suggests that administrative or fundraising costs may be consuming too much of your donations.
⚠ Excessive Executive Compensation
Salaries that are disproportionately high compared to the charity's revenue may indicate mismanagement or prioritization of personal gain over mission fulfillment.
⚠ Unexplained Related-Party Transactions
If Schedule L shows significant related-party transactions, it could be a red flag for potential conflicts of interest, likely diverting funds away from the charity's mission.
⚠ Inconsistent Year-over-Year Trends
Sudden spikes or drops in revenue or expenses over consecutive years can signal instability or poor financial management, warranting a closer look.
Tools + resources
- https://www.guidestar.org
- https://projects.propublica.org/nonprofits
- https://apps.irs.gov/app/eos
- https://charitynavigator.org
- https://bbb.org/charity-reviews
Michigan state-level oversight
In Michigan, donors can also check the state Attorney General’s charitable registry to see if organizations are compliant with state laws. Additionally, the Better Business Bureau offers charity reviews specific to Michigan, while local associations like the Michigan Nonprofit Association provide resources and support to enhance donor education and charity transparency.