As a responsible donor, verifying a charity’s financial health is vital to ensuring that your contributions are used effectively. Understanding how to read Charity Form 990 can empower you to make informed decisions about your philanthropy. This page breaks down the key components of Form 990, helping you gauge the transparency and operational integrity of organizations like Drive Forward.
Form 990 is the nonprofit sector's annual tax return, publicly accessible and filled with important information about a charity’s finances. This guide will walk you through the essential sections of the form, highlighting what to look for to assess a charity’s program effectiveness, management expenses, and overall governance.
Step-by-step walkthrough
Retrieve the Form 990
Access the nonprofit's Form 990 on platforms like ProPublica Nonprofit Explorer or Candid GuideStar. Search by the charity's name or EIN (Employer Identification Number) to find its most recent filings.
Review Part I Summary
Start with Part I, which provides a snapshot of the charity's mission, revenue, and expenses. Evaluate how much funding goes towards programs versus administrative costs, aiming for a minimum of 75% spent on program activities.
Analyze Part IX - Functional Expenses
Part IX breaks down expenses into categories like program services, management, and fundraising. Look closely at the percentage of funds allocated to program services versus administrative and fundraising costs.
Check Schedule J - Executive Compensation
In Schedule J, compare the executive salaries to the charity's size and revenue. High compensation can be a red flag if it doesn’t align with the organization’s mission outcomes.
Inspect Schedule L - Related Party Transactions
Review Schedule L for any related-party transactions. If a charity conducts business with board members or executives, it could signal potential conflicts of interest or self-dealing.
Compare Year-over-Year Trends
Lastly, analyze financial data across multiple years to identify trends in revenue, expenses, and program growth. Consistent growth and effective expense management signal a transparent and well-run charity.
Positive signals (green flags)
✓ Strong Program Expense Ratio
A program expense ratio exceeding 75% indicates that the charity is effectively allocating its resources towards its mission, ensuring a higher impact for donor contributions.
✓ Transparent Reporting
A charity that provides detailed financial reports and readily shares its Form 990 demonstrates a commitment to transparency and accountability to its donors.
✓ Stable Growth Trajectory
Consistent growth in revenue and program services over the years signals a healthy organization that is effectively managing its resources and expanding its impact.
✓ Engaged Governance Structure
A well-structured board with diverse expertise and active governance practices reflects a robust commitment to oversight and ethical management of the charity.
Warning signals (red flags)
⚠ High Administrative Costs
If the charity spends more than 25% of its budget on administration and fundraising, it may warrant further investigation to ensure funds are adequately directed towards programs.
⚠ Excessive Executive Salaries
High compensation packages for executives, especially if disproportionate to the organization's size and impact, could indicate mismanagement of donor funds.
⚠ Frequent Related-Party Transactions
Multiple transactions between the charity and its board members or executives may expose potential conflicts of interest, raising transparency concerns.
⚠ Declining Revenue or Programs
If there is a downward trend in revenue or program services over several years, it might suggest operational challenges or reduced capacity to fulfill the mission.
Tools + resources
- https://www.propublica.org/nonprofits
- https://www.guidestar.org
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org
- https://bbb.org/charity-reviews
Hartford state-level oversight
In Hartford, Connecticut, transparency is emphasized through state regulations and resources. The Connecticut Attorney General’s office maintains a charitable registry, ensuring compliance and oversight for nonprofits operating in the state. Local chapters of the Better Business Bureau (BBB) also provide charity reviews, giving donors extra assurance. Additionally, the Connecticut Association of Nonprofits offers resources and support for local charities, enhancing transparency and accountability within the nonprofit sector.