As a donor, understanding where your contributions go is vital to ensuring that your support is making a meaningful impact. Charity Form 990 is a comprehensive document that provides insights into a nonprofit's financial health and operational efficiency. By learning how to read this form, you can confidently navigate your charitable choices and ensure your donations are being used effectively.
This page will guide you through the essential sections of Form 990, including how to evaluate program expenses, executive compensation, and potential conflicts of interest. By knowing what to look for, you can make informed decisions and support charities that align with your values and goals.
Step-by-step walkthrough
Retrieve Form 990
Start by accessing Form 990 for the charity you are interested in. You can find it on platforms like ProPublica Nonprofit Explorer, Candid GuideStar, or directly from the charity's website. This document is publicly available and offers a wealth of information.
Review Part I Summary
Focus on Part I of Form 990, which provides a summary of the charity's mission and key financial figures. Look for the total revenue and program service revenue, as this will give you a foundational understanding of the charity's income.
Analyze Part IX Functional Expenses
Navigate to Part IX to break down the charity's expenses. Check the program expenses against administrative and fundraising costs. A well-run charity should spend at least 75% of its budget on programs, indicating effective use of donor funds.
Examine Schedule J Executive Compensation
In Schedule J, assess the salaries of key executives. Compare their compensation to the charity's revenue and size to gauge if their salaries align with their responsibilities. High compensation can raise concerns if it outweighs mission accomplishments.
Check Schedule L for Related-Party Transactions
Finally, review Schedule L for any related-party transactions. These transactions can indicate potential conflicts of interest or self-dealing. It's essential to ensure there is transparency in these dealings to maintain trust.
Positive signals (green flags)
✓ High Program Expense Ratio
If the charity dedicates 75% or more of its expenditures to programs, this indicates a strong commitment to its mission and effective use of funds.
✓ Clear Governance Structure
A well-defined governance structure in the charity's bylaws and board composition suggests transparency and accountability in decision-making processes.
✓ Steady Growth in Revenue
Consistent revenue growth over several years is a positive indicator of donor confidence and effective fundraising efforts.
✓ Transparent Related-Party Transactions
If related-party transactions are disclosed clearly with valid justifications, it reflects a commitment to transparency and ethical practices.
Warning signals (red flags)
⚠ High Administrative Expenses
If over 25% of donations are spent on administrative costs, it may be a sign of inefficiency. Well-managed charities aim for at least 75% of funds to go directly to programs.
⚠ Excessive Executive Compensation
If executive salaries seem disproportionately high compared to revenue and program impact, it could indicate mismanagement of funds or a lack of accountability.
⚠ Frequent Related-Party Transactions
A high number of related-party transactions can signal self-dealing. Always verify that these transactions are appropriately documented and justified.
⚠ Declining Revenue Trends
If you notice a consistent decline in revenue year-over-year, it may be a warning sign regarding the charity's sustainability or donor trust.
Tools + resources
- https://www.app.irs.gov/app/eos
- https://www.charitynavigator.org
- https://projects.propublica.org/nonprofits
- https://www.bbb.org/charity-reviews
- https://www.guidestar.org
Denver state-level oversight
In Denver, Colorado, you can access additional resources for verifying charities. The Colorado Secretary of State maintains a charitable registration database that offers insights into nonprofit compliance. Additionally, the Better Business Bureau (BBB) provides evaluations of local charities, helping you make informed decisions. The Colorado Nonprofit Association also promotes transparency and accountability among local nonprofits, encouraging best practices across the sector.