Your Nonprofit Tax Return Tells a Story To Donors
Written by Erin Tanner, CICF Chief Financial Officer
Form 990, the return that tax-exempt organizations file each year with the IRS, is one of the most visible documents nonprofits produce. As a publicly searchable financial form, it is one of the best examples of transparency in the nonprofit sector. Donors, funders, regulators, and community members can all use your 990 to form an impression.
As the nonprofit research platform Candid has noted, this form functions not only as a tax document but also as a fundraising case statement that tells a story about an organization. What story does your form tell?
As a general note: If any of what follows is confusing, talk to your tax preparer.
Why the 990 matters more than you think
Many donors and stakeholders use the 990 in their decision-making process. While it may not be the lone factor in someone’s decision to give, platforms like Candid make the information convenient to use by translating 990 data into financial reports, ratios, and comparisons.
That convenience changes how this information gets consumed and utilized. Instead of scanning dozens of pages, readers see summaries, trends, and charts. They see ratios that suggest strength, risk, or inconsistency. Those outputs are only as good as the data you provide.
What the 990 actually contains
This form includes far more than a simple revenue and expense summary. It captures how a nonprofit describes its programs and accomplishments. It shows how expenses are allocated between programs and overhead. It presents the balance sheet, including cash, reserves, and liabilities.
Together, these sections answer fundamental questions: How does this organization serve the community? How does it spend money? How financially stable does it appear to be?
For executive directors and staff without a financial background, it is especially important to understand what is included in their 990. Specific sections are especially important to understand because they are often the most visible and provide the most insight to donors and funders.
Behind the numbers
Schedule O of the 990 allows nonprofits to describe their programs and accomplishments in words, not dollars. Used thoughtfully, this section helps readers understand why certain costs exist and how a funder’s resources truly sustain the mission. Rather than a place to copy-and-paste your marketing, this section helps potential donors understand the nuance of what their support could mean.
For instance if costs change, or staffing grows, or infrastructure investments are made, your Form 990 provides space to explain the reasoning behind those decisions. Nonprofits should make use of this opportunity.
Overhead and cost allocation
The Statement of Functional Expenses found in Part IX of the Form 990 is one of the document’s most closely scrutinized segments. It is also one of the most misunderstood.
Take note: An increase in overhead is not inherently bad. Just like for-profits, nonprofits need to invest in staff, systems, facilities, compliance, and fundraising to deliver on their mission. Software, maintenance, training, and workforce support are real costs of doing good work. The 990 provides an opportunity on Schedule O to explain why you needed, for example, new software, and how that increased overhead as a result.
Often, the challenge is not the overhead itself; the challenge is allocating overhead costs accurately to the right column on the Statement of Functional Expenses.
In that section of the 990, when expenses are not allocated accurately among Program Service, Management & General, and Fundraising, the results can be misleading. Rent, utilities, and software often support programs and administration. If those expenses are recorded only in Management & General, organizations may appear to have high overhead. A well-constructed cost allocation plan will help organizations ensure that costs are appropriately split between Management & General and Program services.
Poor expense allocations and methodology do not just affect external perception – they can also limit internal insight. If the information is not accurate or detailed enough to be reflected clearly on a tax return, it is often not available for internal use either. Accurately allocating costs to the appropriate program provides leadership with the information needed to make informed decisions.
How Candid (formerly Guidestar) uses Form 990 data
Candid takes 990 data and converts it into tools that donors and funders rely on.
Using your nonprofit’s tax return, Candid generates indicators such as liquidity or months of cash on hand. It shows funding sources and revenue concentration. Candid makes it easy to measure the share of expenses for programs, administration, and fundraising. It also provides a similar breakdown of an organization’s revenue sources.
These metrics help users compare organizations and assess financial resilience. Understanding how your public data is being used can refine your approach to the 990.
Balance sheet basics that matter
Here’s a final tip for when you have conversations with donors based on what they might have learned from your 990: Understand the nuance of your balance sheet.
It could help you answer any questions or concerns donors may have about your cash or savings. Two balance sheet concepts are especially important here:
First, liquidity matters.
- Not all cash on the balance sheet is available for operations. Restricted funds and designated reserves may not be spendable. Readers who understand this distinction see a clearer picture of an organization’s sustainability.
Second, reserves are a strength, not a weakness.
- Healthy reserves signal planning, discipline, and the ability to weather uncertainty. When clearly explained to donors, your reserves will build confidence rather than concern.
Candid also reminds readers that the 990 does not provide a real-time picture. Information may be many months old by the time it becomes public.
Understanding this could help nonprofit leaders be better prepared to answer donors’ questions about cash and savings and other information from the Balance Sheet.
A reflection for executive directors and finance staff
Before approving and filing your next 990, pause and review the filing together. Ask these questions:
- What story does this return tell about us?
- Do our numbers align with how we actually perform and describe our work?
- Would a donor understand why our costs, cash, and reserves look the way they do?
- Are our allocations accurate and able to support good decision-making?
From both the CFO seat and the board table, one truth becomes clear: the 990 is not just another form. It is a transparency tool that reflects the health and promise of your organization.
When treated thoughtfully, the 990 is an asset. Treated casually, it’s a liability.
About the author
Erin Tanner is the Chief Financial Officer of Central Indiana Community Foundation. She oversees more than $1.4 billion in assets, including a $920 million investment portfolio, in support of regional philanthropy. She brings more than 20 years of experience leading nonprofit finance teams and strengthening organizations through strategic growth and collaboration.
She is passionate about helping nonprofits build practical financial strategies that promote stability, resilience, and long-term sustainability.
