As a donor, you want to ensure your contributions are making a real difference. Understanding how to read and interpret Charity Form 990 is a crucial part of this process. This form is the annual tax return for nonprofits, and it provides essential insights into how your donations are utilized.
This page will guide you through the key components of Form 990, highlighting what to look for, how to identify red flags, and what positive indicators signal a well-run charity. By familiarizing yourself with these elements, you can verify that your support is going toward meaningful programs rather than excessive administrative costs.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 through resources like Candid GuideStar, ProPublica Nonprofit Explorer, or directly from the Arkansas Auto Bridge website. This form is publicly available and offers critical information about the charity’s finances.
Review Part I Summary
Begin your evaluation with Part I of the form, which summarizes the charity’s mission, revenue, and expenses. It provides an overview of their financial health and how they allocate resources toward their programs.
Examine Part IX - Functional Expenses
Look at Part IX to see a breakdown of functional expenses. This section shows how much money is spent on program services versus administrative and fundraising costs. A program-expense ratio of 75% or more is generally a good indicator of effective use of funds.
Check Schedule J - Executive Compensation
Schedule J lists the compensation of key executives. Compare these salaries against the charity’s overall size and revenue. High executive pay relative to mission accomplishment can raise concerns about resource allocation.
Flag Related-Party Transactions in Schedule L
Investigate Schedule L for any related-party transactions. These are important to flag as they may indicate potential conflicts of interest or self-dealing, which could be detrimental to the charity’s mission.
Analyze Year-over-Year Trends
Finally, compare Form 990 across multiple years to identify trends in revenue, expenses, and program efficiency. This historical context can help you assess the charity’s growth trajectory and overall stability.
Positive signals (green flags)
✓ Program-Expense Ratio Above 75%
A program-expense ratio above 75% is a strong sign that the charity is effectively using donations to support its mission, rather than on administrative costs.
✓ Stable or Growing Revenue
Consistent growth in revenue over several years often indicates that the charity is successfully engaging with donors and maintaining public trust.
✓ Transparent Governance Practices
A well-composed board of directors and clear governance policies signal responsible oversight and accountability in the charity’s operations.
✓ Low Turnover in Leadership
Stability in leadership and executive roles can demonstrate the charity's solid management and long-term planning efforts, which are crucial for sustaining mission delivery.
Warning signals (red flags)
⚠ High Administrative Costs
If administrative and fundraising expenses exceed 25% of total expenses, it may indicate that the charity is not prioritizing its program services effectively.
⚠ Excessive Executive Salaries
High compensation for executives, especially when compared to the charity’s size and mission efficacy, can suggest mismanagement of funds and resources.
⚠ Frequent Related-Party Transactions
A pattern of related-party transactions in Schedule L can raise ethical concerns and may imply self-dealing that could undermine the charity’s integrity.
⚠ Declining Program Expenses
If the portion of expenses dedicated to programs is decreasing over time, it may indicate that the charity is becoming less effective in fulfilling its mission.
Tools + resources
- https://www.propublica.org/nonprofits
- https://www.charitynavigator.org
- https://apps.irs.gov/app/eos
- https://www.bbb.org/charity-reviews
- https://www.guidestar.org
- https://www.afpglobal.org
Arkansas state-level oversight
In Arkansas, understanding local regulations and resources is essential for accountable giving. The Arkansas Attorney General’s office maintains a charitable registry that can help verify if charities are compliant with state laws. Additionally, the Better Business Bureau (BBB) offers charity reviews, and the Arkansas Nonprofit Alliance supports local nonprofits in best practices, ensuring transparency and efficiency in the sector.