Here’s what we’ll go through in this guide:
- Why Should You Research a Nonprofit Before You Donate?
- How to Find Out Where Charity Money Goes
- How to Evaluate a Nonprofit’s Effectiveness
- Questions to Ask Yourself Before Donating to a Nonprofit
Why Should You Research a Nonprofit Before You Donate?
In general, nonprofit organizations exist to further a social cause or provide a public benefit.
While many do, some don’t live up to the values and mission they claim.
How nonprofits spend their money may be different than what you expect. For instance, ProPublica has reported on how the Red Cross built just six homes after raising millions for Haiti disaster relief, how St. Jude Children’s Research Hospital keeps billions of dollars in reserves and how a nonprofit college spent more on marketing than financial aid.
Since nonprofits are required to file a document called a Form 990 with the IRS every year, you can check out a nonprofit’s finances for yourself with a few online resources. By taking the time to evaluate the charity before you donate, you can see how effective your donation will be and get peace of mind knowing it’s more likely that the organization effectively spends your donation and does what it says.
How to Find Out Where Charity Money Goes
Any organization with tax-exempt status that takes in over $50,000 per year has to file a Form 990. The annual report shows how a nonprofit spends its money.
Once the IRS makes the Form 990s public, you can find it in ProPublica’s Nonprofit Explorer, a Form 990 lookup tool. Search for a nonprofit by name or browse by state or type.
As of December 2022, the IRS is delayed in releasing nearly half a million tax records stretching back to 2020, according to a ProPublica review. That makes it difficult to see how charities are faring in the wake of the COVID-19 pandemic. Even when the IRS isn’t backlogged, Form 990s don’t provide insight into an organization’s current finances because the documents are typically filed many months after the end of an organization’s fiscal year. For larger organizations such as hospital systems, the wait can be even longer.
To find the most recent tax form for the charities you want to donate to, you can try looking on their websites or reaching out to the organizations to ask for it. Nonprofits are required to share their Form 990 upon request, but not every organization complies.
Form 990s are long and complex documents, but there are a few key things you can look for when researching a charity before you donate. Nonprofit Explorer summarizes these items and also provides the original Form 990 so you can examine it more closely.
Most nonprofits are so-called 501(c)(3) organizations — a reference to the portion of the IRS code that deems those organizations as exempt from certain federal and state taxes. Donations to those organizations are tax-deductible.
But not every nonprofit is a 501(c)(3). The IRS lists many types of nonprofit organizations, and not all of them have the same rules.
Some well-known nonprofit organizations are actually 501(c)(4)s, or “social welfare organizations,” according to the IRS. Donations to 501(c)(4) organizations generally are not tax-deductible, but the group can participate more freely in lobbying and advocacy. Many community-based groups and advocacy groups are categorized as 501(c)(4)s.
Some nonprofits are structured so you can donate to either a 501(c)(3) or a 501(c)(4). For example, you can donate to the ACLU, a 501(c)(4), to support its lobbying and advocacy activities, but you won’t be able to deduct it on your taxes. Or, you can make a tax-deductible donation to the ACLU Foundation, a 501(c)(3), to support litigation and public education initiatives.
If getting the tax deduction is important to you, confirm the nonprofit’s IRS tax status before donating.
You can find a charity’s IRS status in Box I of Form 990.
Most people donate to a nonprofit to support a specific program or service. If that’s the case for you, you’ll want to make sure the program you care about is prioritized when the organization budgets its money.
Understanding how nonprofits allocate money across programs is a good way to see how your donation will be spent. It’s also smart to figure out whether the organization made any recent major changes to its programs or mission.
You can find program spending information in Part III of Form 990. Some nonprofits include program descriptions in supplemental information at the end of the document.
Fundraising is a critical source of cash for most nonprofits, and it’s common to have staff members who work on raising enough money for the organization to carry out its mission.
It’s not a problem for nonprofits to spend some money on their fundraising efforts. But it can be a problem when charities spend far more on professional fundraising than on the programs themselves.
You can see how much a nonprofit spends on professional fundraising in Part I, Line 16a of Form 990.
Nonprofits are required to disclose the names and salaries of the five highest-paid employees as well as other key staff and board members. Executive salaries at nonprofits are often heavily scrutinized, in part because of this public disclosure.
Like professional fundraising fees, a higher-than-expected number isn’t necessarily a problem. Nonprofits often compete for employees with for-profit companies, and so many try to pay what they believe to be market rates. High executive salaries can be an issue if they are disproportionate to program spending or aren’t comparable with organizations of similar size and complexity.
You can find executive compensation data in Part VII of Form 990.
Other Items to Look For on a Form 990
Program spending, fundraising fees and executive compensation are three key ways to assess a nonprofit. But you can dive even deeper into nonprofit finances if you know where to look on a Form 990.
Here’s where to find other nonprofit financial information that might interest you:
Employees and Voting Members
- Number of employees: Part V, Line 2a
- Number of voting members in governing body: Part VI, Line 1a
- Number of independent voting members: Part VI, Line 1b
- Individuals with over $100,000 in compensation: Part VII, Line 2
- Amount spent on advertising and promotion: Part IX, Line 12a
- Participation in lobbying activities: Part IV, Line 4; Schedule C, Part II
- Fees for lobbying services: Part IX, Line 11d
Business Relationship Disclosures
- Business relationships of board members and their families: Part IV, Line 28; Schedule L, Part IV
Other Financial Health Metrics
- Total functional expenses: Part IX, Line 25a
- Total assets, beginning of year: Part X, Line 16a
- Total assets, end of year: Part X, Line 16b
- Net gain or loss on sale of assets: Part VIII, Line 7d
- Total liabilities, beginning of year: Part X, Line 26a
- Total liabilities, end of year: Part X, Line 26b
- Investment income: Part VIII, Line 3
- Total program service revenue: Part VIII, Line 2g
How to Evaluate a Nonprofit’s Effectiveness
Understanding where a nonprofit’s money goes is only part of evaluating an organization. It’s also important to understand the impact of the dollars spent on programs and services.
Check the nonprofit’s website and social media for information about its impact. Many nonprofits will release newsletters or impact statements about the work they’ve accomplished. You might also find testimonials from people they’ve helped in the past.
You can also use a charity review site to get additional information. Free online resources like Charity Navigator and BBB Wise Giving Alliance aggregate ratings and reviews for nonprofit organizations. They’re all a little different, but they generally rate nonprofits on transparency, finances and effectiveness.
Other Questions to Ask Before Donating to a Nonprofit
Here is a quick list of questions to ask yourself before you make a donation to a nonprofit:
- Do you believe in the organization’s mission?
- Does the nonprofit seem to live up to its mission? How do you know?
- Can you find clear information about the impact of its work?
- Does it spend the bulk of its money on programs?
- Does it have a religious or political affiliation? If so, do you mind?
- Is the website secure and up to date?
- Is there anything about the nonprofit that concerns you?