Donors like you play a crucial role in ensuring that charities operate with transparency and accountability. Understanding how to read a charity's Form 990 can empower you to make informed giving decisions. This essential document provides insights into a nonprofit's financial health, program effectiveness, and governance.
In this guide, we’ll walk you through the key sections of Form 990, including how to access it and what to look for. By the end, you’ll be equipped with the knowledge to assess charities like Desert Wheels in Arizona effectively.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 for Desert Wheels by visiting ProPublica Nonprofit Explorer. This user-friendly platform allows you to search for nonprofits by name and view their financial documents for free.
Examine Part I Summary
Start with the Part I summary to get a quick overview of the organization. You'll find key information such as revenue, expenses, and net assets, which will help you gauge the charity's financial health.
Analyze Part IX Functional Expenses
Delve into Part IX to see the breakdown of functional expenses. Compare program expenses to administrative and fundraising costs, aiming for a program-expense ratio of 75% or higher, indicating effective use of donor funds.
Review Schedule J for Executive Compensation
Check Schedule J to understand how much the executive team is compensated. Compare these salaries against the charity’s size and revenue to ensure they align with industry norms, reflecting responsible governance.
Check Schedule L for Related-Party Transactions
Evaluate Schedule L for any related-party transactions. Be cautious if you find these relationships, as they can indicate potential conflicts of interest or self-dealing within the organization.
Compare Year-over-Year Trends
Finally, compare year-over-year data to spot trends. Look for growth in program expenses and stable executive compensation, which can signal effective management and mission alignment.
Positive signals (green flags)
✓ High Program Expense Ratio
A program-expense ratio exceeding 75% signals a well-managed charity that prioritizes its mission over administrative costs, indicating that your contributions are likely being put to good use.
✓ Stable Executive Compensation
If executive salaries are consistent with industry benchmarks and don’t show extreme fluctuations, it demonstrates sound financial oversight by the charity’s board, reflecting a responsible approach to governance.
✓ No Related-Party Transactions
Absence of related-party transactions indicates a commitment to transparency and proper governance, suggesting that the charity is not engaged in self-dealing or conflicts of interest.
✓ Growth in Program Expenses
An increase in program expenses year-over-year can indicate that the charity is expanding its services and outreach, showing a commitment to furthering its mission and community impact.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program-expense ratio is below 75%, it may suggest that the charity is not effectively utilizing donor funds, potentially allocating too much to administrative or fundraising costs.
⚠ High Executive Compensation
Excessive salaries, especially in relation to the charity's size, can indicate mismanagement or misalignment of priorities, raising concerns about whether funds are directed toward mission-critical activities.
⚠ Related-Party Transactions
If you find numerous transactions with related parties on Schedule L, it may signal potential conflicts of interest, suggesting that funds could be diverted away from the charity's mission.
⚠ Declining Program Expenses
A downward trend in program expenses over the years can point to failing effectiveness or focus, which may impact the charity's ability to fulfill its mission successfully.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://www.irs.gov/charities-non-profits
- https://apps.irs.gov/app/eos
Arizona state-level oversight
In Arizona, you can also verify charity information through the Arizona Attorney General's charitable organization registry. This registration ensures accountability and compliance with state regulations. Additionally, the Better Business Bureau (BBB) provides charity reviews that can help you assess local nonprofits like Desert Wheels, and the Arizona Association of Nonprofits offers resources for donors seeking trustworthy organizations.