Donating to a charity is a noble act, but ensuring that your funds are used effectively is equally important. Form 990 is the annual tax return filed by nonprofits, offering you a glimpse into how your donations are spent. It’s publicly available and serves as a vital tool for transparency and accountability in the nonprofit sector.
This guide will provide you with a step-by-step walkthrough on how to access and navigate Form 990, highlighting key sections that reveal crucial information about a charity’s financial health and operational efficiency. By understanding these components, you can make informed decisions before donating.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 by visiting ProPublica Nonprofit Explorer (https://projects.propublica.org/nonprofits) or Candid GuideStar (https://www.guidestar.org). Search for the charity by name to find their most recent Form 990.
Review Part I Summary
Begin with Part I, which provides a summary of the charity’s mission, accomplishments, and revenue. This section gives you insight into their overall effectiveness and key activities.
Analyze Part IX Functional Expenses
Focus on Part IX, where program expenses, administrative costs, and fundraising expenses are broken down. Ideally, a charity should allocate 75% or more of its budget to programs, indicating efficient use of funds.
Check Executive Compensation (Schedule J)
Examine Schedule J for executive compensation details. Compare the salaries to the charity’s revenue and mission impact to assess if compensation is aligned with performance.
Investigate Related-Party Transactions (Schedule L)
Assess Schedule L for any related-party transactions. Flag any self-dealing situations or excessive transactions as potential red flags that could affect the charity's integrity.
Compare Year-over-Year Trends
Look at the charity’s Form 990 from previous years to identify trends in revenue, expenses, and program efficiency. This will help you understand their growth trajectory and stability.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% indicates that the charity effectively focuses its resources on mission-driven work, which is a positive sign for potential donors.
✓ Transparent Executive Compensation
If executive compensation aligns reasonably with the charity’s size and mission success, it reflects financial integrity and responsible governance.
✓ Limited Related-Party Transactions
Few or well-justified related-party transactions are typically a sign of good governance practices and minimize conflicts of interest.
✓ Consistent Growth Trajectory
A steady increase in revenue and program activities over the years demonstrates the charity’s sustainability and effectiveness in addressing community needs.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, this could indicate that the charity is spending too much on administration and fundraising, rather than on mission-related activities.
⚠ High Executive Salaries
Excessive salaries for executives compared to revenue may suggest mismanagement of funds. Ensure that compensation is reasonable and reflects the charity’s size and mission accomplishments.
⚠ Frequent Related-Party Transactions
Repeated transactions with related parties can indicate potential conflicts of interest. Watch for self-dealing situations that could harm the charity’s credibility.
⚠ Declining Revenue or Program Activities
A consistent decline in revenue or program activities over several years might signal financial instability or reduced impact, warranting further investigation.
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
Fort Worth state-level oversight
In Fort Worth, Texas, donors can verify charities through the Texas Attorney General’s Office, which maintains a charitable registry. The local Better Business Bureau (BBB) also offers charity reviews for added reassurance. Additionally, organizations such as the Texas Nonprofit Council provide guidance on best practices in nonprofit governance, ensuring transparency and accountability in the charitable sector.