Donating to a charity is a noble act, and as a donor, it's important to ensure that your contributions are used effectively. Understanding the financial health of a charity is crucial, and one way to do that is by reading their Form 990. This form is a public financial report filed by nonprofits, detailing their income, expenses, and operational structure.
In this guide, we will walk you through the essential components of Form 990, such as the summary, functional expenses, executive compensation, and related-party transactions. By equipping yourself with this knowledge, you can scrutinize how well a charity allocates its resources and ensure your donations contribute to meaningful outcomes.
Step-by-step walkthrough
Retrieve Form 990
Begin by accessing Form 990 for the charity you are interested in. You can find it on Candid GuideStar, ProPublica Nonprofit Explorer, or directly on the charity's website. This form is publicly available and should be easily accessible.
Read Part I Summary
Part I provides an overview of the charity's mission, revenue, and expenses. Look for the total revenue versus total expenses to gauge financial health. A well-run charity will show that it spends a significant portion of its revenue on programs rather than administrative costs.
Analyze Part IX Functional Expenses
In Part IX, you'll find a breakdown of expenses. Pay attention to the program expenses, administrative costs, and fundraising expenses. A target program-expense ratio of 75% or more is generally desirable, indicating that most funds support the charity’s mission.
Check Schedule J Executive Compensation
Schedule J lists executive salaries. Compare these salaries against the charity's size and revenue. High executive compensation in relation to the organization’s effectiveness may raise red flags about priorities and resource allocation.
Review Schedule L Related-Party Transactions
Schedule L reveals any related-party transactions, which can indicate potential conflicts of interest. Be cautious of self-dealing, where the charity may be paying insiders rather than serving its mission.
Positive signals (green flags)
✓ High Program-Expense Ratio
A program-expense ratio of 75% or more indicates that the charity effectively channels its funds into programs that meet its mission, suggesting responsible management.
✓ Transparent Executive Compensation
Clear reporting of executive salaries that correspond to charity size and mission accomplishment reflects transparency and accountability to donors.
✓ Minimal Related-Party Transactions
Few or no related-party transactions suggest that the charity operates with integrity and avoids conflicts of interest, enhancing trust in its operations.
✓ Consistent Growth in Program Expenses
An increase in program expenses year-over-year is a positive sign of growth and commitment to fulfilling its mission, aligning with donor expectations.
Warning signals (red flags)
⚠ High Administrative Costs
If the charity spends a significant portion of its revenue on administrative costs rather than programs, it may indicate inefficiency or mismanagement.
⚠ Excessive Executive Salaries
High compensation for executives compared to the charity’s revenue and mission accomplishment can suggest misaligned priorities within the organization.
⚠ Multiple Related-Party Transactions
Frequent transactions involving board members or executives could suggest self-dealing, which undermines trust and accountability within the charity.
⚠ Diminishing Program Expenses Year-Over-Year
A declining percentage of funds allocated to program expenses over time is a warning sign that the charity may not be staying true to its mission.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.charitynavigator.org
- https://www.irs.gov/apps/eos
- https://bbb.org/charity-reviews
- https://www.candid.org
Mississippi state-level oversight
In Mississippi, donors can further verify charities through the state Attorney General's office, which maintains a charitable registry. The local Better Business Bureau also offers charity reviews, helping you ensure that donations are directed to reputable organizations. Additionally, the Mississippi Center for Nonprofits provides resources and support for local nonprofits, fostering transparency and best practices in the sector.