Evaluating the financial health of a charity helps you understand their ability to serve others today and into the future. Are they a stable or growing organization? Are they a new organization who is just getting off the ground with an uncertain financial future? Are they in decline?

Until now, evaluating those financial documents was a difficult thing to do. But this article shows you where to look and what to look for.

The 990

The IRS Form 990 is the tax document charities file with the IRS. But there are many versions of the 990 and some charities don’t file a 990 at all. Why is that? What do the different forms mean?

• 990: The full form is only required for charities with ≥$200,000 income or ≥$500,000 in assets.
• 990-EZ: A simpler 2 page return for charities with less than < $200,000 in income and <$500,000 in assets.
• 990-N: A simple eight-question return for charities with less than $25,000 income.
• No 990: Some institutions, such as religious charities are exempt from filing a 990 at all. It’s also possible that the organization is doing charitable work but is not actually an IRS approved 501(c)3 organization– i.e. they are not a charity and file different tax documents.
• 990-PF: For private foundations. It’s not likely that you’ll make donations to private foundations.

What next?

You have a charity and you’re thinking about donating. Here’s what you do next…

If the charity files a 990-N or is exempt…

Many great charities you should consider donating to will not have robust financial documents for you to evaluate. In that case, call them. Ask

1. Where does your income come from?
2. How do you spend it?
3. How has your financial situation changed over the past few years?
4. How do you feel about the financial future of your charity?

It’s impossible to know their exact financial situation, so it’s an art of picking up on many different cues. How confidently do they answer these questions? How much fundraising experience do they have? How are their marketing materials? Do you feel confident there is sufficient oversight to prevent misuse of funds?

Based on your research, how do you feel about the financial future of this charity? If their future is uncertain, are you ok if they close down next year knowing that your donation this year allowed them to help others?

If the charity files a 990 or 990 EZ…

Reviewing 990’s are mostly about recognizing patterns, so review the last three years of returns. Over the last three years, what patterns do you notice?

1. Is revenue going up or down (line 12)?
2. Do they typically run a deficit (line 19)?
3. Do they have assets to withstand tough times (line 22)?
4. Are they heavy on a primary funding source that could leave them vulnerable if those sources dried up (Section VIII and for large donors/private foundations check Schedule B Part 1)

Not exactly related to finances, but a piece of information you can find on the 990’s will also give you an idea about the level of professionalism and oversight the charity– and that mean a healthier charity overall.

• Are there at least 5 board members most of whom are not paid (Section VII)?

When evaluating the 990’s keep your focus on the patterns you see over the course of those three years. Feel free to note and ask them about unusual items or expenses, but keep in mind, a single year does not necessarily give you much context for evaluating the financial health of a charity.

Based on this information, how do you feel about the financial health of this charity? Do you still want to support them?

What do you think?

Do you evaluate a charity’s financial docs before you donate?
What do you look for in a charity’s financial situation?