As a donor, you deserve to know how your contributions are being utilized. Understanding a charity’s financial health can help you make informed decisions about where to direct your support. One of the best tools at your disposal is Form 990, the IRS-required annual return for nonprofits.
This page will guide you through the essential parts of Form 990, including how to retrieve it and what key metrics to scrutinize. By mastering this form, you can assess a charity's mission alignment, financial responsibility, and overall effectiveness.
Step-by-step walkthrough
Retrieve Form 990
Start by going to ProPublica Nonprofit Explorer (projects.propublica.org/nonprofits). Search for Capital Wheels and access the latest Form 990. You can also use GuideStar or the charity's own website.
Review Part I Summary
Part I outlines the organization’s mission, revenue, and expenses. Check if the reported mission aligns with your values and if the revenue is stable or growing.
Analyze Part IX Functional Expenses
In Part IX, differentiate between program expenses, administrative costs, and fundraising. A robust charity typically spends 75% or more on its programs, which is crucial for effectiveness.
Check Schedule J for Executive Compensation
Look at Schedule J, which discloses executive salaries. Compare these figures against the charity’s size and revenue to assess if compensation is reasonable relative to mission impact.
Investigate Schedule L for Related-Party Transactions
Schedule L reveals any related-party transactions. Be cautious of any self-dealing, which can indicate potential conflicts of interest or mismanagement.
Compare Year-over-Year Trends
Finally, review multiple years of Form 990 if available. Look for trends in revenue, expenses, and program effectiveness to gauge the charity's growth trajectory.
Positive signals (green flags)
✓ High Program-Expense Ratio
A program-expense ratio of 75% or more signals that the organization is effectively channeling funds towards their mission, indicating responsible financial management.
✓ Clear Accountability in Compensation
If executive compensation appears justified relative to the organization's mission, size, and performance, it indicates a focus on accountability and transparency.
✓ Consistent Growth in Revenue
An upward trajectory in revenue over the years suggests that the organization is successfully engaging the community and that donor trust is strong.
✓ Transparent Governance Structure
A well-defined governance structure, including board diversity and clear roles, enhances transparency and supports effective decision-making within the charity.
Warning signals (red flags)
⚠ High Executive Compensation
If executive salaries are disproportionately high compared to revenue and program expenses, it could indicate mismanagement or a lack of focus on the charity's mission.
⚠ Low Program-Expense Ratio
A program-expense ratio below 75% may suggest that too much of the budget is going towards administrative costs or fundraising, which could be a red flag for its effectiveness.
⚠ Frequent Related-Party Transactions
Multiple related-party transactions listed in Schedule L can indicate potential self-dealing, which raises concerns about transparency and governance.
⚠ Declining Revenue or Growth
If the revenue is consistently declining or stagnant, it may show that the charity is struggling to maintain donor support and could affect their ability to fulfill their 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
- https://www.afpglobal.org
Albany state-level oversight
In Albany, New York, you're encouraged to check the New York State Attorney General's Charitable Registry to verify the status of a charity. Additionally, the Better Business Bureau (BBB) provides charity reviews that can offer insights into local organizations. The New York State Nonprofit Association also supports transparency and accountability in the nonprofit sector, ensuring that charities meet high standards of governance.