As a donor, you want to ensure your contributions are making a tangible difference. Understanding how to analyze a charity's Form 990 is crucial for verifying transparency and accountability. This page will walk you through the essential elements of Form 990, empowering you to make informed decisions about where to invest your charitable giving.
Form 990 provides a wealth of information on a nonprofit's financial health, including expenditure ratios, compensation levels, and governance. By learning to navigate this document, you can spot red flags and reassure yourself about the legitimacy of a charity's operations—all in the name of supporting worthy causes in Ohio.
Step-by-step walkthrough
Access Form 990 Online
Retrieve the charity's Form 990 from resources like ProPublica Nonprofit Explorer (projects.propublica.org/nonprofits) or Candid GuideStar. These platforms provide free access to detailed financial documents for registered nonprofits.
Review Part I Summary
Look at Part I, which summarizes the nonprofit's mission statement and core activities. This section gives you a quick overview of what the charity claims to accomplish, setting the stage for deeper analysis.
Analyze Part IX Functional Expenses
Check Part IX for a breakdown of functional expenses, including program, administrative, and fundraising expenses. A well-run charity should have 75% or more of its expenses allocated to program services, indicating effective fund usage.
Evaluate Executive Compensation in Schedule J
Examine Schedule J for details on executive compensation. Compare these salaries against the charity's revenue and size. High compensation could be a concern, especially if it doesn't align with the mission's effectiveness.
Flag Related-Party Transactions in Schedule L
Look for any related-party transactions in Schedule L. These can indicate self-dealing, which may raise ethical questions about how funds are being managed and whether the charity is serving its mission adequately.
Compare Year-Over-Year Trends
Lastly, compare the current year's Form 990 to previous years to identify trends in revenue, expenses, and compensation. Significant changes can provide insights into the charity's financial health and operational practices.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% shows that the charity focuses on its mission, using the majority of its funds directly for program services.
✓ Transparent Financial Practices
A charity that openly shares its financial information and engages in regular audits demonstrates accountability and builds donor trust.
✓ Diverse Revenue Sources
If the charity has multiple funding sources, it may indicate stability and reduce reliance on a single donor or grant, which is a positive signal.
✓ Strong Board Governance
A clearly defined and diverse board of directors with transparent governance practices reflects a commitment to ethical operations and enhances accountability.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may indicate the charity spends too much on administrative or fundraising costs, suggesting inefficiency.
⚠ High Executive Compensation
Executive salaries that are disproportionately high compared to the charity’s revenue can raise questions about resource allocation and mission commitment.
⚠ Related-Party Transactions
Frequent or significant transactions with board members or executives can indicate potential conflicts of interest and self-dealing, undermining trust.
⚠ Stagnant or Declining Revenue
A declining revenue trend over multiple years could signal operational difficulties or decreased donor confidence, impacting the charity's long-term viability.
Tools + resources
- https://apps.irs.gov/app/eos
- https://projects.propublica.org/nonprofits
- https://www.charitynavigator.org
- https://bbb.org/charity-reviews
- https://www.guidestar.org
Ohio state-level oversight
In Ohio, you can verify a charity's legitimacy through the Ohio Attorney General's Charitable Registration database. This tool allows you to check if the nonprofit is registered and up to date in compliance with state regulations. Additionally, the Better Business Bureau (BBB) provides charity reviews to help you make informed choices. Local nonprofit associations can also offer insights into reputable charities in your area, enhancing your donor education.