Filed 990s: A Comprehensive Guide to Understanding Nonprofit Financials
When it comes to understanding the financial health and operations of a nonprofit organization, one of the most crucial documents to examine is the Form 990. This annual filing provides a wealth of information about a nonprofit’s income, expenses, assets, liabilities, and governance. In this detailed guide, we’ll delve into the various aspects of the Form 990, helping you gain a deeper understanding of how these documents can be a valuable tool for both donors and stakeholders.
What is a Form 990?
The Form 990 is an informational return that must be filed by most tax-exempt organizations in the United States. It is designed to provide the IRS and the public with a clear picture of a nonprofit’s financial activities and operations. By reviewing a Form 990, you can gain insights into how an organization is using its resources, its governance structure, and its compliance with tax laws.
Understanding the Form 990 Structure
The Form 990 is divided into several sections, each focusing on a different aspect of the organization’s operations. Here’s a brief overview of the key sections:
| Section | Description |
|---|---|
| Part I: Governance, Management, and Operations | Information about the organization’s board of directors, officers, and key employees, as well as details on governance policies and practices. |
| Part II: Revenue | Details on the organization’s income, including contributions, grants, investment income, and program service revenue. |
| Part III: Expenses | Information on the organization’s expenses, including salaries, benefits, program services, and management and general expenses. |
| Part IV: Changes in Net Assets | Details on the organization’s net assets, including contributions, grants, and investment income. |
| Part V: Statement of Financial Position | A summary of the organization’s assets, liabilities, and net assets. |
| Part VI: Required Supplmental Information | Additional information that may be necessary to provide a complete picture of the organization’s operations. |
Key Information to Look For
When reviewing a Form 990, there are several key pieces of information you should pay attention to:
- Revenue and Expenses: Analyze the organization’s revenue and expenses to determine if it is financially stable and if it is using its resources effectively.
- Salaries and Benefits: Review the compensation of the organization’s executives and key employees to ensure it is reasonable and in line with industry standards.
- Program Service Revenue: Assess the proportion of revenue that comes from program services to determine the organization’s focus and effectiveness.
- Investments: Look at the organization’s investment policies and performance to ensure they align with its mission and risk tolerance.
- Excess Benefits Transactions: Check for any excess benefits transactions, which could indicate potential conflicts of interest or misuse of resources.
Using Form 990s for Due Diligence
For donors and stakeholders, reviewing Form 990s is an essential part of due diligence. It allows you to make informed decisions about where to allocate your resources and to hold organizations accountable for their financial transparency and effectiveness. Here are some tips for using Form 990s effectively:
- Compare Organizations: Look at the financials of multiple organizations to identify trends and make more informed decisions.
- Review Historical Data: Analyze the organization’s financial performance over time to identify any red flags or areas of concern.
- Consult with Experts: If you’re not familiar with financial statements, consider consulting with a professional who can help you interpret the data.
Conclusion
Form 990s are a valuable resource for understanding the financial health and operations of a nonprofit organization. By taking the
