Donors like you deserve to know how your contributions are being utilized. A Charity Form 990 is a nonprofit's annual tax return, providing crucial insights into its financial health and transparency. This page will guide you in understanding how to read this important document, allowing you to verify whether a charity aligns with your values before donating.
We will walk you through key sections of the Form 990, including expense breakdowns, executive compensation, and potential conflicts of interest. With this knowledge, you'll be able to assess a charity's effectiveness, financial practices, and overall credibility. Your diligence is essential in making informed decisions that lead to impactful giving.
Step-by-step walkthrough
Retrieve the Form 990
Visit Candid GuideStar, ProPublica Nonprofit Explorer, or the charity's website to download the Form 990. This form is a nonprofit's annual tax return and is publicly accessible.
Check Part I Summary
Look at Part I for a snapshot of the charity's mission, revenue, and expenses. This provides initial insight into the organization's focus and operational scale.
Analyze Part IX for Expenses
Review Part IX, which breaks down functional expenses. Focus on the program expense ratio—aim for at least 75% of expenses directed toward programs, indicating effective use of funds.
Review Schedule J for Executive Compensation
Examine Schedule J to see executive salaries. Compare compensation against the charity's size and revenue to ensure that the pay aligns with mission accomplishment.
Flag Related-Party Transactions
Look for Schedule L, which details related-party transactions. Note any self-dealing practices, as these may indicate conflicts of interest or mismanagement.
Compare Year-Over-Year Trends
Finally, look for changes over time in key areas like revenue, expenses, and program effectiveness. This historical context can help you gauge the charity's growth trajectory.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of 75% or higher indicates that the charity is effectively directing its resources toward its mission, fostering confidence in its operations.
✓ Transparent Leadership
Clear and reasonable executive compensation relative to charity revenue suggests a commitment to responsible governance and alignment with the charity’s mission.
✓ Limited Related-Party Transactions
Minimal related-party transactions indicate strong governance practices and a lower risk of conflicts of interest, enhancing trust in the organization's integrity.
✓ Positive Growth Trends
Consistent growth in revenue and program reach shows that the charity is successfully expanding its impact, which is a strong indicator of long-term viability.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it may suggest that the charity is spending too much on administration and fundraising rather than its mission.
⚠ Excessive Executive Salaries
High salaries for executives compared to organizational revenue can indicate misaligned priorities, raising concerns about funds mismanagement.
⚠ Related-Party Transactions
Frequent related-party transactions may suggest self-dealing or conflicts of interest, which can impact the charity’s integrity and effectiveness.
⚠ Declining Revenue or Program Reach
A consistent decline in revenue or program outreach may raise questions about the charity's sustainability and effectiveness over time.
Tools + resources
- https://www.guidestar.org
- https://projects.propublica.org/nonprofits
- https://www.irs.gov/app/eos
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
South Dakota state-level oversight
In South Dakota, all charities must register with the South Dakota Secretary of State and comply with state regulations. Donors can also consult the South Dakota Attorney General’s website for additional information and insights. Local chapters of the Better Business Bureau (BBB) provide valuable ratings and reviews of nonprofits operating in the area. Engaging with these resources enables South Dakota residents to make informed decisions when supporting local charities like PrairieAuto Gifts.