How to Read a 990 When Making Donations
When deciding whether to donate to a nonprofit, you want to ensure that your money is being used effectively. One of the best tools for evaluating a nonprofit’s financial health and transparency is the Form 990, which nonprofits file annually with the IRS. This document provides insight into an organization’s financial practices, leadership, and overall impact. Here’s how to use a 990 to guide your giving decisions and make sure your money goes to nonprofits that will efficiently use your donation to create change that is meaningful to you.
A 990 form is a powerful tool for understanding how a nonprofit operates. Taking the time to analyze this document ensures that your contributions are making a real difference.
Where to Find a Nonprofit’s 990
Many nonprofits make their 990 forms available on their websites, but you can also access them for free through databases such as:
- IRS Tax Exempt Organization Search
- GuideStar (by Candid)
- Charity Navigator
- ProPublica
Once you have the 990, you can begin analyzing key areas to determine if the organization aligns with your philanthropic values.
Review Revenue and Expenses
Look at Part I and Part VIII of the 990 to understand where the nonprofit’s money comes from and how it is spent. Key considerations include:
- Sources of Revenue: Is the organization funded primarily through donations, grants, program fees, or investments?
- Program vs. Administrative Expenses: Ideally, a significant portion of the budget should go toward programs rather than administrative or fundraising costs. Many charity watchdogs recommend that at least 70% of expenses go toward programs.
Check Executive Compensation
In Part VII, you can see salaries for key staff members. While competitive salaries are necessary to attract top talent, excessive compensation can indicate financial mismanagement. Compare compensation against organizations of similar size and scope.
Assess Transparency and Governance
Part VI of the 990 details the nonprofit’s governance practices. Look for:
- Board Independence: A diverse and independent board helps ensure accountability.
- Conflict of Interest Policy: This ensures ethical decision-making.
- Financial Audits: Organizations that conduct independent audits demonstrate financial responsibility.
Evaluate Program Impact
Schedule O provides narratives about the organization’s mission and accomplishments. This section can help you determine whether the nonprofit is making a meaningful difference in its area of focus.
Check for Red Flags
Watch for warning signs such as:
- Significant Deficits: Repeated financial losses can indicate instability.
- Excessive Fundraising Costs: If too much money is spent on fundraising instead of programs, donations may not be used efficiently.
- Large Unrestricted Net Assets: While savings are good, excessive reserves without a plan for use may suggest inefficiency.
Conclusion
Before making your final decision, one last step is to compare the nonprofit’s 990 with similar organizations in the same sector. This can help you determine whether their financials and impact align with industry standards. A 990 form is a powerful tool for understanding how a nonprofit operates. By reviewing financial health, governance, and impact, you can make an informed decision about where to donate your money. Taking the time to analyze this document ensures that your contributions are making a real difference.