What a Form 990 says—and doesn’t say—about a nonprofit

A nonprofit’s Form 990 is not only a legally required tax form but also a fundraising case statement—for better or for worse. This annual filing can illuminate, but it can also be misread. Here are some common misperceptions about Forms 990:

Misconception #1. Form 990 offers a complete, real-time picture of a nonprofit

There are several Forms 990, designed for different-sized tax-exempt organizations and requiring varying degrees of information. (Not to mention the 990-PF, which is the form filed by grantmaking foundations.)

• Form 990-N, also known as the “postcard,” is for small organizations with annual gross receipts (the total amount received from all sources) of less than $50,000. It requires basic contact information, proof of receipts, and little else.
• Form 990-EZ is for organizations with annual gross receipts between $50,000 and $200,000. It requires a breakdown of fundraising activities, expenses and income, and program activities, as well as Schedules A (proof of public support) and B (list of donors).
• Form 990 is the standard form and requires all of the above, plus more. Organizations with annual gross receipts over $200,000 or total assets over $500,000 are required to complete this form.

All Forms 990 are due May 15, but organizations can get a six-month extension. That means that the information could possibly be as much as a year old by the time the form is made available to the public.

Misconception #2. Financial expenditures are the only thing that matters

As a tax document, Form 990 focuses mostly on revenue and expenses—as do some donors. However, Part III of Forms 990 and 990 EZ (but not Form 990-N) lets organizations cite their programs’ accomplishments. Nonprofits would do well to fill this out in detail. Narrative and program descriptions can shed light on financial data, highlighting for donors their return on investment (ROI).

While the IRS developed Forms 990-N and 990-EZ to ease the burden on smaller organizations in terms of time and money, small nonprofits can choose to file the longer Form 990. For example, a nonprofit with under $50,000 in revenue might consider it if: 1) they plan to apply for grants; and 2) have accomplishments they can tout. The longer Form 990 can help demonstrate transparency to donors. One study found that nonprofits that voluntarily file a Form 990 receive a significant boost in donations.

Misconception #3. Low overhead equals high efficiency

Some donors pay close attention to executive compensation (Part VII of Form 990) and fundraising expenditures (Part IX) in an effort to calculate a nonprofit’s overhead—what it spends on administrative costs relative to its programs. If salaries and fundraising expenses are more than 35% of total expenses, conventional wisdom deems them “too high.” Unfortunately, some funders even cap overhead rates for their grantees at as low as 10%-15%, even though the sector average is 20%.

This is an overly simplistic—and frankly unfair—way of evaluating a nonprofit. A nonprofit is still a business and needs to invest in staff, IT, marketing, and, of course, fundraising in order to advance its mission. For example, an early-stage nonprofit on a growth trajectory might have higher fundraising and marketing costs, or a workforce development nonprofit that’s training tech workers might need a robust IT system and skilled staff to facilitate.

A better measure of a nonprofit’s efficiency is how well it’s achieving its mission. This is another reason for nonprofits to take advantage of the program description section of Form 990: to put expenses in context and demonstrate efficiency.

Misconception #4. Nonprofit executives shouldn’t receive high compensation

In Part VII, organizations are required to enter salaries for officers, directors, and trustees, as well as any key employees receiving over $150,000. Compensation packages that would be considered low or average in the for-profit sector are seen by some as excessive at a nonprofit—even for top management. But highly qualified, experienced leaders expect payment commensurate with their abilities. Also, some nonprofits need leaders with specialized skill sets, such as health care organizations.

One way to counter this misperception is to elaborate on good governance practices in Part VI. Here, organizations can outline policies they follow, such as explaining how compensation is determined and any benchmarks used.

At Candid, we say, “no numbers without stories and no stories without numbers.” Forms 990 can be used to tell an organization’s story—if filled out properly—and it pays to do so. Institutional funders review the 990 carefully as a standard part of their grantmaking due diligence, and charity rating sites often base their ratings in large part on Form 990 information. One expert says one of the biggest risks nonprofits face isn’t the decisions they make, it’s how (or whether) they explain them, and the 990 offers ways to do that.