Donors deserve to feel confident in their charitable contributions. Understanding how to read a charity's Form 990 is a key part of that process. This document is a nonprofit's annual tax return, publicly available and packed with invaluable information about where your money goes.
This guide will walk you through the critical sections of Form 990, including how to assess a charity’s program expenses, executive compensation, and potential conflicts of interest. By following these steps, you can ensure that your donations are used effectively and responsibly.
Step-by-step walkthrough
Retrieve the Form 990
Visit ProPublica Nonprofit Explorer or Candid GuideStar to search for the charity you're interested in. Simply enter the charity's name or EIN to access its Form 990 for the most recent year.
Read Part I - Summary
Part I provides a high-level overview of the charity's mission, revenue, and expenses. Pay attention to the 'Revenue' section to understand total income and how much goes directly to programs versus administrative costs.
Analyze Part IX - Functional Expenses
Focus on the breakdown of program expenses versus administrative and fundraising costs. A well-run charity typically should have a program-expense ratio of 75% or more, which means most of the funds are going directly to their mission.
Check Schedule J - Executive Compensation
Review the salaries of top executives to see how they compare to nonprofit standards. A high salary might be justified in larger organizations but should align with the charity's revenue and mission.
Examine Schedule L - Related Party Transactions
This schedule lists any transactions between the charity and its board members or key employees. Be cautious of any self-dealing, which can indicate conflicts of interest.
Positive signals (green flags)
✓ High Program Expense Ratio
A program-expense ratio of 75% or more indicates the charity is effectively using donations to fulfill its mission and serve its beneficiaries.
✓ Transparent Compensation Practices
If executive salaries are in line with industry standards and tiered to the size of the organization, it reflects responsible governance.
✓ Growth in Revenue and Programs
An increase in both revenue and program expenses over time signals organizational growth, sustainability, and donor trust.
✓ Active Board Governance
A well-structured board frequently reviewing policies and practices enhances accountability and strengthens the charity's mission.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the charity's program expense ratio is below 75%, it may be a sign that too much money is spent on administrative costs rather than aiding those in need.
⚠ High Executive Salaries
Excessive compensation for executives compared to the charity's revenue could indicate a misalignment of priorities, potentially detracting from its mission.
⚠ Frequent Related-Party Transactions
If there are numerous transactions with board members or executives listed in Schedule L, this may raise concerns about self-dealing and lack of transparency.
⚠ Year-over-Year Decline in Revenue
A consistent decrease in revenue or program funding over multiple years might suggest financial instability or declining donor confidence.
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
- https://www.afpglobal.org
West Virginia state-level oversight
In West Virginia, transparency in charitable giving is supported by the state Attorney General’s Office, which maintains a charitable registry for nonprofits. The local Better Business Bureau also provides charity reviews, ensuring donors can verify organizations before contributing. Additionally, the West Virginia Nonprofit Association offers resources to strengthen the sector's accountability and effectiveness.