Donors today have a wealth of resources available to ensure their contributions are effectively used. Understanding how to read a charity's Form 990 is a vital part of this verification process. This form serves as a nonprofit's annual tax return, detailing their financial health, program expenses, and governance. With this knowledge, you can make informed decisions about where to allocate your charitable dollars.
Our guide walks you through the key sections of Form 990 that every donor should examine, including the summary of the charity's activities, expenses breakdown, executive compensation, and any related-party transactions. You'll learn how to identify the red flags and green flags that indicate a charity's operational integrity, empowering you to donate with confidence.
Step-by-step walkthrough
Access Form 990
Retrieve the charity's Form 990 from ProPublica Nonprofit Explorer, Candid GuideStar, or the charity's website. It's publicly available and provides key financial information about the nonprofit's operations.
Review Part I Summary
Start by examining Part I, which summarizes the charity's mission, revenue, and expenses. This provides a quick snapshot to understand its overall financial health.
Analyze Part IX for Expenses
Part IX breaks down functional expenses, highlighting how much of the budget is allocated to programs versus administrative and fundraising activities. Ideally, program expenses should be above 75%.
Check Executive Compensation on Schedule J
Schedule J details compensation for top executives. Compare these figures with the charity's size and revenue. Excessively high salaries can raise concerns about fund allocation.
Examine Schedule L for Related-party Transactions
Look at Schedule L to identify any related-party transactions, which may indicate self-dealing or conflicts of interest. Take note of any unusual transactions that could signal potential issues.
Compare Year-over-Year Trends
For a comprehensive view, compare the charity's Form 990 data year-over-year. Look for trends in revenue, expenses, and program funding to assess its growth trajectory and stability.
Positive signals (green flags)
✓ Program Expense Ratio Above 75%
A program expense ratio exceeding 75% is a strong signal that the charity prioritizes funding its core mission over administrative costs.
✓ Transparent Executive Salaries
If executive compensation is reasonable and aligns with the charity's size and revenue, it indicates a commitment to transparency and responsible management.
✓ Minimal Related-party Transactions
A lack of significant related-party transactions shows that the charity operates with integrity, prioritizing its mission over personal interests.
✓ Consistent Growth Trends
Continuous growth in revenue and program funding reflects a sound financial strategy, indicating the charity's ability to expand its impact sustainably.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it might indicate that the charity allocates a significant amount of funds to administrative and fundraising efforts rather than direct services.
⚠ High Executive Compensation
Excessive executive salaries can be a red flag, suggesting that a charity may prioritize management costs over mission fulfillment. Compare these with industry standards.
⚠ Significant Related-party Transactions
If Schedule L shows substantial related-party transactions, it could imply self-dealing, raising questions about the integrity of the charity's operations.
⚠ Inconsistent Year-over-Year Data
Look for inconsistencies in the financial data from year to year. A sudden decrease in program funding or revenue might indicate financial instability.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
Hawaii state-level oversight
In Hawaii, accountability and transparency in charities are paramount. The Hawaii Department of the Attorney General maintains a charitable registry, allowing donors to verify the legitimacy of nonprofits operating in the state. Additionally, the Better Business Bureau provides charity reviews to help donors make informed decisions. Local organizations like the Hawaii Alliance of Nonprofit Organizations (HANO) advocate for best practices and transparency among charities in the region.