How to Research a Nonprofit Before You Donate

You want to give to a cause you care about, but you want to make sure your money is going to an organization that will use it well. That’s a reasonable thing to want, and the information you need to make that decision is publicly available.

Every tax-exempt nonprofit in the United States files annual returns with the IRS. These filings contain detailed financial information: how much money the organization brings in, how it spends that money, what it pays its executives, and more. You just need to know where to look and what to look for.

Step 1: Verify tax-exempt status

Before anything else, confirm that the organization is actually a registered 501(c)(3) tax-exempt organization. This matters for two reasons: it means the IRS has reviewed and approved their application, and it means your donation is tax-deductible.

Search for the organization on the IRS Tax Exempt Organization Search or on 501(see). If the organization doesn’t appear, that’s a significant red flag: either they’re not tax-exempt, or they’re not who they claim to be.

Also check whether their status is current. Organizations that fail to file returns for three consecutive years automatically lose their tax-exempt status. The IRS maintains a list of organizations that have had their status revoked.

Step 2: Look at the financials

Once you’ve confirmed the organization is legitimate, look at their 990 filing for the basic financial picture.

Revenue

How much money does the organization bring in? Revenue comes from several sources: donations and grants, program service revenue (fees for services), investment income, and other sources. An organization that relies heavily on a single source of revenue is more vulnerable than one with diversified funding.

Expenses by category

This is the most important section for donors. Nonprofits report expenses in three categories:

• Program services: Money spent directly on the organization’s mission
• Management and general: Administrative costs, accounting, legal, etc.
• Fundraising: Costs of soliciting donations

There’s no universal “right” ratio, but as a rough benchmark, well-run organizations typically spend 70-85% of expenses on programs. If program expenses are below 60%, that warrants a closer look.

Be cautious about applying these ratios too rigidly, though. A startup nonprofit may have high administrative costs as it builds infrastructure. An advocacy organization may have legitimately higher overhead than a direct-service provider. Context matters.

Revenue vs. expenses

Is the organization spending more than it takes in? A single deficit year isn’t necessarily a problem; organizations draw down reserves for planned investments. But multiple years of deficits suggest financial distress.

Conversely, an organization that consistently takes in far more than it spends might be hoarding resources rather than deploying them toward its mission.

Step 3: Check executive compensation

Look at Part VII of the 990 to see what the organization’s leaders are paid. Executive compensation should be reasonable relative to the organization’s size and sector.

There’s no single number that’s “too high.” A hospital system CEO earning $500,000 is probably reasonable; a small local charity’s executive director earning that amount is not. Compare against similar organizations to calibrate your expectations. 501(see) makes this easy by letting you search officer compensation across organizations.

Step 4: Look at trends, not snapshots

A single year’s filing is one data point. Look at 2-3 years of filings to see trends:

• Is revenue growing or declining?
• Are program expenses keeping pace with revenue growth?
• Is executive compensation growing faster than the budget?
• Has the organization’s net assets changed significantly?

Trends tell you much more than any single number. An organization with declining revenue and rising administrative costs is in a different situation than one with growing revenue and expanding programs, even if their current-year numbers look similar.

Step 5: Read the mission and programs

Part III of the 990 is where the organization describes its mission and its three largest programs by expense. This is self-reported and varies in quality, but it tells you what the organization says it does and how much it spends on each major program.

Does the mission align with what you care about? Do the program descriptions sound like real work, or are they vague and generic? Is the organization focused, or is it trying to do everything?

Red flags to watch for

• No 990 filings available. If the organization claims to be a nonprofit but has no filings, it may not be legitimate.
• Program expenses below 50%. Most of the money is going to overhead and fundraising rather than the mission.
• Excessive executive compensation. Compensation that seems wildly disproportionate to the organization’s budget.
• Sudden large changes. A huge spike in revenue with no corresponding program growth, or a dramatic drop in net assets, warrants investigation.
• No board of directors listed. Every 990 lists the governing body. If the board is very small (1-2 people) or consists entirely of family members, governance may be weak.
• Repeated late filings. Organizations that consistently file late or receive extensions may have internal management issues.

What ratings sites do (and don’t) tell you

Sites like Charity Navigator, GuideStar (Candid), and BBB Wise Giving Alliance provide ratings and evaluations that can be useful starting points. But they have limitations:

• Ratings are based primarily on financial ratios, which don’t capture program effectiveness
• Not all organizations are rated; small or new nonprofits may not appear
• Some ratings require the organization to self-report additional data, creating a selection bias

Use ratings as one input, not the only one. The underlying 990 data is richer than any summary score.

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Researching a nonprofit before donating doesn’t have to be complicated. The financial data is public, the tools to access it are free, and spending 10 minutes reviewing the basics can give you much more confidence in where your money is going.

Research any nonprofit’s financials on 501(see) – free, no account required.