The IRS Form 990 is used to gather information about nonprofit and other tax-exempt organizations’ activities, governance and detailed financial information so that the IRS can ensure that organizations continue to qualify for tax-exempt status. Form 990 data has always been made publicly available in the form of scanned images, and in June 2016, the IRS announced that data from 2011 to the present would be available online in a more easily readable data format and can be downloaded as XML files through Amazon Web Services.

Commentary thus far on the release of Form 990 data has underscored that, in an increasingly data-driven world, the availability of nonprofit financial data will lead to greater transparency in the nonprofit sector. Some have further proposed that this data could be used to closely monitor nonprofits and flag possible misuse of funds or predict financial crisis. NFF values data and transparency, and we also recognize that access to more data comes with a great responsibility to make sure that it’s used thoughtfully. Form 990 data alone reflects a narrow slice of an organization’s financial situation, and we at NFF know firsthand how complex an organization’s financial story can be. Our hope is that access to this data can be used to better understand how nonprofits are faring and lift up the types of support and investment they need in order to thrive. To that end, we have proposed some recommendations on how 990 data can be used to better assess the financial health needs of social sector organizations.

Understand what 990 data can – and cannot – tell us
Forms 990 collect standardized information from income statements and balance sheets. This data is useful for conducting analysis on past financial trends and can help inform conversations on the opportunities, challenges, and resource needs of nonprofits. For example, a funder could look at how balance sheet composition for a nonprofit has changed over the past several years to get a better understanding of its immediate and long-term capital needs. Or a research organization could investigate how revenue composition within a particular social sector has changed over time in order to determine trends in government funding, philanthropy, individual giving, and other sources.

However, 990 data lacks important details about the full picture of nonprofits’ financial situations. One of the most crucial nuances of nonprofit finance is the concept of donor-imposed restrictions, or guidelines on how revenue must be spent by a nonprofit. While Forms 990 provide a breakdown of net assets by restriction, they do not differentiate between restricted and unrestricted revenue in a given year; this leads to a potentially misleading picture of how a nonprofit’s revenues cover its expenses. A nonprofit might appear to be well-capitalized but in fact may be struggling to make payroll because too many of its dollars are restricted. Additionally, Forms 990 do not allow for a distinction between “operating” activity (i.e., regular, year-over-year revenues and expenses) and “non-operating” activity (i.e., one-time, extraordinary revenues and expenses). Being able to separate the two is necessary for understanding and measuring an organization’s health and resilience. For example, if an arts organization is in the midst of a successful capital campaign to open a new facility, without separating out the non-operating revenues from fundraising, its financial picture could appear extremely robust at a moment when it might be lacking unrestricted funds for operating its regular programs.

Explore analysis tools that are designed to give a more complete picture
Recognizing that Form 990 data is missing crucial context, we encourage those who are looking for nonprofit data to find tools that are oriented around mission achievement and financial health – not tax-exempt status compliance. For example, GuideStar has created a platform, GuideStar Platinum, for nonprofits to share their impact data in addition to 990 data for a more complete view of how they are stewarding resources in service of their communities. Also, NFF partnered with GuideStar to create Financial SCAN, an online tool that shows a clear and comprehensive picture of a nonprofit’s financial condition and history. Financial SCAN reveals patterns in financial information with a guide for interpretation and discussion, helping organizations and funders make the connection between money and mission.

Use 990 data to open a dialogue
When NFF partners with an organization to explore change or opportunity, we look at a variety of financial documents, especially audited financial statements whenever they’re available. However, gathering this information is only the beginning of our exploration into an organization’s dynamics. Our research and analysis is always supplemented by learning directly from organizational leadership and other stakeholders about how they accomplish their mission to better understand its connection to finance. This provides invaluable context for working collaboratively to address their toughest challenges and greatest opportunities. From our work with thousands of nonprofits, we know that internal strategic decisions are largely influenced by external forces such as funding environment and community need, not just an organization’s financial position. The numbers only tell part of the story.

Forms 990 provide far less detail than audited financial statements, and without conversation and dialogue, it’s impossible to understand a nonprofit’s individual circumstance. Perhaps there were confounding factors that led to a difficult financial situation – factors that would be misinterpreted if viewed only in a statistical or trend analysis. Devoid of context, the wrong types of 990 data analysis could risk regressing us back to archaic, one-dimensional measures of nonprofit effectiveness such as “percent dedicated to overhead.”

Instead, access to 990 data can help us advance the conversation on real costs. In a response to “Pay-What-It-Takes” in Stanford Social Innovation Review’s Up for Debate series, Antony Bugg-Levine and Fred Ali contributed a post titled “Grantmaking Should Be Grounded in Real Costs,” in which they note that “successful approaches begin with an open and comprehensive understanding of the full costs each organization requires to achieve results.”

Greater data availability on nonprofit organizations – coupled with thoughtful use of this data – can help us understand the financial dynamics of the nonprofit sector. We urge members and supporters of the nonprofit sector to consider this newly available trove of Form 990 data as a way to investigate the deeper context and complex environment in which nonprofits operate. The more data we have to advocate for changes that will help set nonprofits up for success, the better off our communities will be.