As a donor, it's vital to ensure that your contributions are being used effectively to support the mission of your chosen charity. Understanding how to read Form 990, the annual tax return for nonprofits, is a crucial step in conducting due diligence. This form is publicly available, allowing you to assess a charity’s financial health and transparency.
This page will guide you through the essential parts of Form 990, including how to interpret key sections like program expenses and executive compensation. By understanding what to look for, you can make informed decisions about your charitable giving to organizations like Green Wheels.
Step-by-step walkthrough
Retrieve Form 990
Access Form 990 for Green Wheels from Candid GuideStar, ProPublica Nonprofit Explorer, or the charity's own website. This form is a public record and contains crucial financial information.
Read Part I Summary
Begin with Part I, which summarizes the charity's mission and activities. This provides insight into what the organization aims to achieve and the scope of its work.
Analyze Part IX Functional Expenses
Review Part IX to see the breakdown of expenses. Look for the program-expense ratio—ideally, over 75% should be allocated to programs rather than administration or fundraising.
Check Schedule J for Executive Compensation
Examine Schedule J to understand how much is paid to executives. Compare these salaries with the charity's size and revenue; high compensation may raise concerns.
Flag Related-Party Transactions in Schedule L
Look at Schedule L for any related-party transactions. These could indicate potential conflicts of interest, especially if they involve self-dealing or excessive payments.
Compare Year-over-Year Trends
Finally, review Form 990 across multiple years to observe trends. Look for consistency in program allocation and whether the charity’s financial health is improving.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% signals a well-run charity that prioritizes mission-driven activities over excessive administrative costs.
✓ Transparent Executive Compensation
Clear and reasonable executive compensation indicates transparency and accountability, reassuring donors that funds are managed responsibly.
✓ Minimal Related-Party Transactions
A lack of related-party transactions shows adherence to ethical standards and a commitment to avoiding conflicts of interest.
✓ Consistent Financial Growth
Positive trends in revenue and program expansion over time reflect a charity’s increasing impact and sustainability.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If the program expense ratio is below 75%, it raises questions about whether funds are being used effectively to fulfill the charity's mission.
⚠ High Executive Salaries
Excessively high executive compensation compared to the charity’s size and revenue could indicate mismanagement of donor funds.
⚠ Frequent Related-Party Transactions
A pattern of related-party transactions can suggest self-dealing, where insiders may benefit financially at the expense of the charity's mission.
⚠ Negative Year-over-Year Trends
Declining revenues, increasing administrative costs, or consistent deficits over multiple years may indicate financial instability or mismanagement.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.candid.org
- https://www.charitynavigator.org
- https://www.bbb.org/charity-reviews
- https://apps.irs.gov/app/eos
Vermont state-level oversight
In Vermont, the Attorney General's Office maintains a charitable registry, ensuring transparency and accountability for nonprofits in the state. Additionally, you can consult the Better Business Bureau for charity reviews or the Vermont Nonprofit Association for further resources on local nonprofits. As a donor in Vermont, understanding these local regulations and resources helps ensure your contributions are impactful.