Charitable giving is a meaningful way to support causes you care about. From helping those in need to promoting social and environmental justice, your donation is a surefire means of making a positive change in the world. Or is it?
Not all charities are created equal, and it’s important to do your due diligence before making a donation. Fortunately, if you start a search online today, you can learn more about how to evaluate a charity.
Do Charities Need To Be Scrutinized?
In a word, yes. You’ve likely heard paranoid whispers about major nonprofits misallocating gross amounts of donations before. However, some of those whispers are well-founded.
ProPublica has investigated high-profile cases in which nonprofits (like Red Cross and St. Jude Children’s Research Hospital) have failed to put donations to good use. So, to ensure that your money goes to those in need, you should evaluate a charity before you give.
Form 990 Is Your Friend
Form 990 is a document that tax-exempt organizations must file with the Internal Revenue Service (IRS) each year. It provides information about an organization’s programs, finances, and governance. These details are used by the IRS and the public to evaluate an organization’s compliance with tax laws and regulations.
Since Form 990 requires organizations to disclose details about their income, expenses, assets, and liabilities, the general public can easily calculate whether they’re living up to their mission statements.
Even though Form 990 is a long, dry read, key sections can be inspected to gauge a charity’s merits. Under Part III of the document, readers can find out how a particular nonprofit divides its donations. The information also reveals the amount of money that a nonprofit spends on administrative costs and fundraising expenses.
Form 990 also includes a section where nonprofits can describe their programs and activities in more detail. In these fields, an organization can list their goals, strategies, and accomplishments. This section can provide valuable information to the public about the organization’s mission, the impact of its programs, and how it uses its resources.
Checking a charity’s IRS Status is another way to learn more about a particular nonprofit. As there are many types of nonprofits, an organization’s code will tell readers whether donations to that enterprise are tax deductible or non-deductible.
Some charities identify as 501(c)(3) organizations. Among other benefits, this designation exempts a charity from paying federal income taxes on its income and donations. Donations to 501(c)(3) organizations are therefore tax-deductible for donors, which can incentivize individuals and businesses to give to charitable causes.
501(c)(4) organizations, on the other hand, are social welfare organizations that can get involved in political advocacy and lobbying. Donations to these organizations are not tax-deductible.
Another area of Form 990 that warrants close scrutiny is how charities compensate executive level employees. All nonprofit organizations must reveal the identities and salaries of their top five employees, as well as other significant staff and board members.
A lofty executive salary is not always a smoking gun. However, when executive salaries are deemed excessive in relation to program spending, or when compared to executives at other charities of a similar size, it can suggest the misallocation of funds.
Check A Charity’s Website
Some charities are more transparent than others, holding themselves to account for every misstep. For example, GiveWell – a nonprofit dedicated to helping donors find suitable charities – has a page on their website titled “Our Mistakes”.
While it’s refreshing to see some organizations take responsibility for their failures, those instances are voluntary. Any admissions made on a charity’s website can be helpful, but they don’t negate the need to check Form 990 as well.
Reach Out With Questions
Many donors prefer to reach out to representatives with further questions. For example, if an organization has a high turnover rate, or engages in unusual practices, donors can ask for clarity before they donate.
Whether in person, over the phone, or by reviewing the charity’s website, donors can get peace of mind by asking direct questions. Some good questions to ask include:
- What percentage of donations goes toward programs versus administrative and fundraising expenses?
- What specific programs or projects will the donation support?
- Can the charity provide evidence of its impact and results?
- What is the charity’s financial situation, including its assets and liabilities?
- How transparent is the charity about its finances and operations?
Make A Meaningful Difference
Through using Form 990 and these suggestions, you can evaluate a nonprofit organization’s financial health, governance, and effectiveness in achieving its mission. A nonprofit’s financial data, program spending, and executive compensation are key metrics to better understanding what kind of impact a donation will make.
While Form 990 is just one tool in the evaluation process, it provides valuable insights into a nonprofit’s operations and can help donors make more informed decisions. By taking the time to evaluate charities, donors can ensure that their contributions are making a meaningful difference in the causes they care about.