As a donor, ensuring that your contributions are used effectively is essential. One of the best ways to assess a charity's financial health and operational transparency is to review its Form 990, the annual tax return required of nonprofits. This document provides a wealth of information about a charity's activities, financial position, and governance, allowing you to make informed decisions about your philanthropic endeavors.
On this page, we will guide you through the process of accessing and interpreting Form 990, focusing on key sections that reveal important insights into a charity's operations. With this knowledge, you can confirm that your donations are being used wisely and effectively, contributing to the greater good in our Indianapolis community.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 from credible sources like Candid GuideStar, ProPublica Nonprofit Explorer, or the charity's website. You can find the most recent filings to review the charity's financial details comprehensively.
Examine Part I Summary
Start with Part I, which provides a snapshot of the charity's mission, major activities, and financial highlights. This section gives you an overview of how the charity aligns with its stated goals.
Analyze Part IX Functional Expenses
Part IX breaks down expenses into program services, administrative, and fundraising costs. A well-run charity typically spends 75% or more on program services, indicating effective use of donor funds.
Review Schedule J for Executive Compensation
Schedule J outlines the compensation for the charity’s highest-paid staff. Comparing these salaries against the charity’s size and revenue can reveal if resources are allocated with mission accomplishment in mind.
Check Schedule L for Related-Party Transactions
In Schedule L, look for any related-party transactions, which could indicate potential conflicts of interest or self-dealing. This helps ensure accountability in financial dealings.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio of 75% or higher is a positive indicator that the charity is effectively using funds for its intended programs.
✓ Reasonable Executive Compensation
Salaries that align closely with industry standards and the size of the organization suggest responsible financial management.
✓ Transparent Reporting
A charity that readily shares its Form 990 and annual reports demonstrates openness and a commitment to transparency with its donors.
✓ Steady Growth Trajectory
Consistent growth in revenue and program services over time reflects a healthy organization that is effectively meeting community needs.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If less than 75% of total expenses are allocated to program services, it may suggest the charity is not prioritizing its mission effectively.
⚠ Excessive Executive Salaries
High executive compensation relative to total revenue can be a red flag, indicating that funds may not be directed towards program delivery.
⚠ Self-Dealing Transactions
Related-party transactions reported in Schedule L should raise concerns if they indicate self-dealing, where key individuals profit from charity resources.
⚠ Inconsistent Year-over-Year Trends
Dramatic fluctuations in revenue or expenses from one year to the next can indicate instability or mismanagement within the organization.
Tools + resources
- https://www.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
Indianapolis state-level oversight
In Indianapolis, potential donors can check the Indiana Secretary of State's website for the state AG's charitable registry, ensuring that charities are registered and compliant with state laws. The local Better Business Bureau also provides charity reviews, offering another layer of accountability. Additionally, organizations like the Indiana Nonprofit Association offer resources to support transparent and ethical practices among nonprofits in the area.