Unlike your personal tax return, anyone can request a copy of your Form 990 from the IRS or search for your filing several online databases. And when they know how to read a 990, they can find out A LOT about your organization.
Watchdog organizations, large donors, and grantmakers regularly use your 990 to uncover a nonprofit’s financial health in just a few seconds. In fact, all major funding sources will review your federal tax filings thoroughly before trusting you with a single penny of their money.
So what do your donors want to see when they read your IRS Form 990? We’ll show you how to read a 990 here, so you can see what they’re looking for. Let’s get started!
🔎 How financially healthy is your organization?
Parts I, VIII, and X
Just by reading these three section of the 990, your donors can get a pretty accurate picture of the financial health of your nonprofit.
First, donors will jump to Part I for a summary of what your organization does. Here, they’ll find your declared mission and/or your activities for the past year. It’s essential that your mission statement on your 990 aligns directly with the declared tax-exempt purpose of your organization. And that the general information aligns with other documents, like your annual report. Inconsistencies will send a confusing message to potential donors.
Next, Section VIII shows them how you raised your money in granular detail, breaking down your funding sources into 6 categories–federated campaigns, membership dues, fundraising events, contributions from related organizations, government grants, and all other donations. They’ll also see detailed breakdowns of any investment income, unrelated business income, and revenue from gaming activities (including raffles, casino nights, etc.)
Finally, in Part X, they’ll see your balance sheet, giving them a quick look at your assets and liabilities to quickly understand the financial viability of your organization. They’ll be looking for any large loans, investments and net assets that are available for operations.
The IRS has different reporting requirements than GAAP, so the balance sheet section of your 990 may not match your audited financial statements. But it still gives anyone the ability to assess your overall financial status in just a few minutes.
🔎 How do you spend your money?
Part IX (Statement of Functional Expenses)
When learning how to read IRS 990, Part IX tells donors the story of how you spend the revenue you receive. Not just the “form” of the expense–like payroll, utilities, rent, or office supplies– but also the “function” of those expenses, meaning the purpose that expense serves in your organization.
The IRS requires that you report expenses broken down into three categories on the statement of functional expenses: program services, fundraising, and management & general (administration).
Most donors want to see that at least 75% of your expenses are used to fund program services. You can see how you’re doing by dividing column B by column A. If you’re not at 75% (or very close, you should understand why and be prepared to explain your reasons to potential funding sources.
🔎 How much do you pay your executives?
Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors
Reading this section of a 990 pulls back the curtain on the inner workings of your leadership team. It can be pretty shocking to find out that anyone can find out how much money you make. But it’s not just you…it’s everyone on your management team, and more!
You’re required to report the compensation of all of your most important employees and even non-employee contractors that were paid large sums (over $100,000).
Donors and watchdogs look at this data closely to understand how responsibly you spent your donations. Of course, that doesn’t mean you shouldn’t pay yourself or your staff a fair salary. But you do need to be aware that the information is publicly available, and don’t be surprised or offended if someone asks about it.
🔎 How much do you spend on your programs?
Part III – Statement of Program Service Accomplishments
Part III shows how much revenue each of your programs earns and how much you’re spending to keep it running. If there’s a significant gap between revenue and expenses at the program level, that could suggest a fundraising need.
Beyond the numbers, Part III is the perfect place for you to showcase your story. You’ll inform potential donors about your programs–how they work and who they benefit–and how each of those programs contributes to fulfilling your mission.
Part III is the perfect example of how the 990 is so much more than simply a “tax” form. The numbers you show work in conjunction with the words you choose to tell your board members, supporters, and potential funding sources about the IMPACT your programs make in the community.
🔎 What’s your story? Tell me more…
Schedule O for Form 990
There are several “schedules” you may have to complete with your 990, depending on the complexity of your organization. But EVERY organization that files the full Form 990 (and certain organizations that file Form 990-EZ) must also file Schedule O.
According to the IRS, “An organization should use Schedule O, rather than separate attachments, to provide the IRS with narrative information required for responses to specific questions…and to explain the organization’s operations or responses to various questions.”
Did you catch that–”to provide narrative information?
That’s right– Schedule O gives you another chance to shape the story your donors will uncover when they read your 990!
In this section, donors can find things like why you’re filing late (if you are), reasons for amended returns, new programs you’ve launched, your process for determining executive compensation, conflict of interest disclosures, and more.
It’s a treasure trove of information for anyone who spends the time digging through it. And your important donors or grantmakers WILL read it.
It’s another chance for you to control the story your donors will read about your nonprofit–so don’t take it lightly! Answer the questions carefully and thoughtfully, and have someone experienced with 990’s review it to ensure that the story you’re telling is the story you want to tell.
What story does your 990 tell about your nonprofit?
Every nonprofit’s tax filing tells a story. And, now that you can read a 990, you’ve seen that you can shape the story it tells to your donors.
But Form 990 is still ultimately a financial document. So to start telling your story, you need reliable, accurate, and timely financial data.
If you’re struggling to produce financial statements that you can rely on or your internal team isn’t experienced enough to provide strong financial guidance, maybe it’s time to consider outsourcing your accounting and bookkeeping process to professionals.
The Charity CFO provides expert financial guidance and streamlined and efficient accounting services to 150+ nonprofits throughout the USA. We onboard a few new clients each month, but we have limited capacity, and space fills up quickly.
If you want to be sure your finances are perfect before your next tax filing, and you want an expert financial partner to help you tell your financial story the right way, then reach out to us for a free consultation. We’ll let you know how we can help you shape a story of success!
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