Ascertaining the Financial Health of a Nonprofit (Part 1)
One of the most common questions we get asked is how to ascertain the financial health of a nonprofit. This article is the first of a series designed to answer just that very question!
For us, the first step is always to turn to the IRS Form 990. As you might be aware, nonprofits described under section 501(c)(3) of the Internal Revenue Code (IRC) are public charities that are tax-exempt and eligible to receive tax-deductible contributions. These organizations are required to file a Form 990 annually with the Internal Revenue Service (IRS).
What is the IRS Form 990?
The Form 990—entitled “Return of Organization Exempt From Income Tax”—is a public document. It is a report that must be filed each year with the IRS by organizations exempt from federal income taxes under section 501 of the IRC, except by those specified by the IRS. There are a couple variations to the Form 990 for organizations who annually have less than $200,000 in gross receipts and/or have less than $500,000 in total assets.
Why is the Form 990 important?
The IRS Form 990 is an essential source of information to help evaluate the financial performance of a nonprofit organization. The Form 990 serves two essential purposes:
- It provides information that helps government agencies (i.e., the IRS and state charity regulators) enforce the laws that govern nonprofits.
- It provides a great deal of information about the nonprofit’s financial condition—about its financial strengths or weaknesses, and about such things as its sources of income and expense breakdowns.
What kind of information can be found in the Form 990?
The information in the Form 990 can be divided into two big categories:
- Factual-type information, such as
- Basic facts about the nonprofit
- What the nonprofit does
- Who its board members are
- Whether it is a public charity or a private foundation
- Whether it engages in lobbying
- Financial information, such as
- Compensation – example: benefits paid to or for members
- Revenue – examples: grants received from individuals and government
- Expenses – examples: management and general expenses
- Assets – examples: cash, land, investments, buildings
- Liabilities – examples: accounts payable and loans
- Net Assets – example: determining unrestricted net assets available for operations
Where can you find the Form 990?
One of the advantages of the IRS Form 990 is that it is accessible to everyone. Many organizations post their Form 990 on their own website (you can find ours here), but the Form 990 can be found on several other websites, usually for free. Some of these websites include National Center for Charitable Statistics, GuideStar and Foundation Center. These websites allow you to search for the nonprofit you are interested in and download a copy of its 990.
In follow up articles, we will go through how to read the Form 990 and things to watch out for, but the first step is to understand the value this document has in assessing the health of a nonprofit.
This article was submitted by Liège Ayub and Breanne Foster.