Every year most charities must file a 990 tax return with the IRS. These forms contain a wealth of information about charities, but like most tax forms, they can be a bear to digest. For some charities these forms can be more than 100 pages long.
But you only need to focus on a very few of these pages. To get a charity’s 990 tax form, see How to check out a charity.
The first page will give you a summary of the organization’s revenue and expenses during the most recent two years (It can take a year before a charity's tax form has been filed and then becomes available publicly. In the spring of 2016 for example, the most recent tax form available online for most charities was its 2014 form, which actually covers its 2013 fiscal year. However, charities are required to make their 990 forms available through their websites or by calling.)
Page 7 gives you a list of the organization’s officers, directors, key employees, highest compensated employees and independent contractors (though only those receiving more than $100,000 from the organization). This can be very interesting. Some charities have employees with extremely low salaries; others pay their top staff what most of us would consider high salaries. It’s important to put salaries in perspective. Many charities are very large organizations, often with staff in multiple states and/or countries. We’ll soon be writing more about average and excessive salaries in the charity world.
Page 9 and 10 are very important. Page 9 tells you the source of its revenue. This can tell you whether government grants and/or charges for program services make up large portions of its support. The 990 form does not tell you who supports the organization nor how much of its support comes from individuals, foundations or corporations.
Page 10 breaks down the organization’s expenses, in two ways. First it lists amounts spent on 24 types of expenses – program, salaries and wages, office expenses, information technology, travel, etc. Second it divides up each of these expenses according to whether it was a program-service expense, management expense or fundraising expense.
By focusing on line 25 (Total Functional Expenses) you can figure out the percentage of its revenue that a charity spends on its services vs. its fundraising and management (overhead). You can use a simple formula to figure out overhead:
Line 25C (management) plus 25D (fundraising) divided by line 25A (total expenses).
If a charity’s total expenses (25A) are $1 million and its management and fundraising expenses are $100,000, its overhead is 10% ($100,000 divided by $1 million).
We tell you this percentage for every charity in this website. But don’t just assume that the lower this percentage the better the charity.
On page 10, look closely at the breakdown of line 12 – Advertising and promotion. Is the amount it spent on this attributed solely to “fundraising expenses” or is some of it attributed to “program service expenses?”
It is okay in some cases that promotion be seen as in part a program service. If a charity is trying to educate people about its cause or build support for a policy change, it can attribute some of what it spends on promotion to program services. But some charities have gotten into trouble by attributing too much of its promotion and advertising expenses to program services and then not actually doing much to educate people about its cause or to change public policy. A recent example of this is the Wounded Warriors Project, a subject we will explore in a future article.
You can learn a lot more about a charity from its 990 tax form, such as whether it engages in lobbying to make changes in public policy, whether it supports other charities and who those charities are, and more. We’ll be soon adding to this article on how to read a 990 tax form.