Donating a car to charity is one of the best ways to get a chunk of money deducted from your client’s tax bill. It is also one of the more complicated issues faced by donors and charities alike. To clear up some of the thornier issues, Kars4Kids, a national car donation charity, interviewed Jerry Love, CPA, PFS, ABV, CITP, CFF, CGMA, who has extensive experience consulting clients on donating cars to charities.
Kars4Kids: How common is it that clients cannot end up using the deduction because the charity did not provide the proper documentation?
Jerry Love: In the past few years the Internal Revenue Service has increased the regulations for documenting a donation of a vehicle to a charity. Taxpayers are responsible for their own tax return and should have a basic understanding of rules related to items claimed on their return. Failure to do so may cause deductions to be disallowed and give rise to the IRS assessing penalties.
Kars4Kids: What is the proper documentation that donors should get from the charity?
JL: The first thing to determine is whether the value (or the deduction) is in excess of $500. The IRS regulation about the donation of vehicles includes not only automobiles but also applies to boats, airplanes and motorcycles.
The regulations state that no deduction is allowed unless the taxpayer has attached contemporaneous written acknowledgment from the organization receiving the vehicle to their tax return, which must contain specific information about the donated vehicle and certifications by the organization’s use and disposition of the vehicle. Contemporaneous means that you received the written acknowledgment no more than 30 days after the date of sale or date of contribution.
The allowable deduction by the taxpayer for a vehicle is the lesser of the fair market value at the time of the donation or the gross sales proceeds received by the charity if the organization sells the vehicle without making significant repairs and had not used the vehicle in its charitable program for a sustained period of time.
The charity receiving the vehicle is required to provide to the taxpayer a written acknowledgment that includes the following information:
Whether the charity sold the vehicle without material improvement;
Whether the charity sold the vehicle without making significant repairs or modification; or
That the charity sold the vehicle below the fair market value to a needy individual in the furtherance of the charities exempt purpose (or made a gratuitous transfer to a needy person).
These substantiation rules apply for charitable contributions of $250 or more. For all contributions received that have a value in excess of $250, a charity is required to provide a letter or similar acknowledgment to the donor that states:
The amount of the cash contribution or the description of any noncash contribution (this acknowledgment is not required by IRS regulations to indicate a value for the noncash contribution but as indicated above, the charity may be required to communicate the disposition of a vehicle and the proceeds received); and
Whether the charity provided any goods or services to the donor including a description of what the donor received along with a good-faith estimate of the value of the goods or services.
When the noncash contribution has a fair market value less than $250, the charity must give a receipt in the form of a letter or other written communication which includes the following:
The date the contribution is received;
The name of the donor and the name of the receiving charity;
The location of where the donation was made; and
A description of the property in sufficient detail.
Since it is not uncommon for charities to use a third party to administer a vehicle donation program, the taxpayer should be aware that their tax deduction may be substantially less than they anticipated by estimating the deduction from the Blue Book values, depending on how the donation is valued.
All charities who accept the donation of a vehicle are required to give each donor a Form 1098-C. The charity is required to issue a separate 1098-C for each vehicle donated to them that has a fair market value of at least $500. The charity is also required to submit the Form 1098-C to the IRS. The taxpayer should assume that the IRS computer is programmed to match the taxpayer’s deduction to the Form 1098-C much like the IRS matches reported interest and dividend income. Form 1098-C can also serve as the contemporaneous written acknowledgment.
Kars4Kids: What constitutes significant repairs or modification and material improvement?
JL: IRS Notice 2005-44 defines it this way, “Material improvement includes a major repair or improvement that improves the condition of the qualified vehicle in a manner that significantly increases the value. Cleaning, minor repairs and routine maintenance are not considered material improvements."
Services that are not considered material improvements include:
Application of paint or other types of finishes (such as rust proofing or wax);
Removal of dents and scratches;
Cleaning or repair of upholstery; and
Installation of theft deterrent devices.
Kars4Kids: How does one value the car? Is it from the eventual auction sale of the car? Or fair market value at the time of donation?
JL: If the deduction will be for a value in excess of $5,000, no charitable deduction is allowed for contributions of property unless the taxpayer gets a qualified appraisal of the property and attaches the appraisal to the return for the tax year. However, if the organization provides the required contemporaneous written acknowledgment and sells the vehicle without any significant intervening use or material improvement, and the deduction will not exceed the gross proceeds from the sale, no qualified appraisal is required.
For vehicles that the deduction will be less than $5,000, the deduction should be based on the fair market value of the vehicle which may be determined by any reasonable method. One generally acceptable method of valuing a vehicle is by reference to an established/published pricing guide (such as the Kelly Blue Book or the National Automobile Dealers Association Used Car Guide).
However, a pricing guide should only be used if the guide distinguished the fair market value for a vehicle that is the same make, model and year, sold in the same geographic area and in the same condition.
Kars4Kids: Wouldn’t the actual sale price of the vehicle be a more accurate indicator of the value of that vehicle? The IRS Pub 526 seems to indicate that is the method of valuating vehicles worth more than $500.
JL: IRS Notice 2005-44 indicates, “If the qualified vehicle is sold by the donee organization without a significant intervening use or material improvement by the donee organization, then... the deduction claimed by the donor may not exceed the gross proceeds received from the sale of the qualified vehicle. In no event may the deduction for a donated vehicle exceed the amount that is otherwise allowable... (fair market value).... If a donor contributes a qualified vehicle that is subsequently sold... without any significant intervening use or material improvement by the donee organization, and the sale yields gross proceeds of $500 or less, the donor may be allowed a deduction equal to the lesser of the fair market value of the qualified vehicle on the date of the contribution or $500, subject to the terms and limitations of [Internal Revenue Code] Section 170. Under these circumstances, the donor must substantiate the fair market value... and, if the fair market value is $250 or more, must substantiate the contribution with an acknowledgment that meets the requirements [previously described].”
Kars4Kids: Is there a value level for a car that you would say is not worth donating?
JL: For the individual to receive a tax benefit for making any contributions, whether they are cash or noncash, the taxpayer must be able to itemize their deductions. They would only itemize their deductions if the total of these deductions exceeded their allowable standard deduction. They should consult their CPA to ascertain if they are able to itemize.
Kars4Kids: Does car donation provide any financial benefit for someone that doesn’t itemize deductions on their tax return?
JL: No, it does not.
Kars4Kids: Is there a limit to how much a donor can deduct for charitable expenses, and what are his options if he exceeds that amount?
JL: Basically an individual taxpayer is limited to the amount of contributions they can make to charities and deduct in the year. This limitation is basically 50% of their adjusted gross income for contributions to most charities, but is subject to certain adjustments. If the taxpayer’s contribution exceeds this limitation, then the excess contributions are carried forward to subsequent tax years. Contributions can be carried forward for five years.
Kars4Kids: Can a donor claim the tax deduction the following year if they forgot this year? Or should they file an amended return?
JL: If a taxpayer forgot a deduction when they filed their tax return, they should file an amended tax return for the year the contribution was made.
Kars4Kids: When does a donor count the deduction – when the car was donated or when the charity auctioned the car (if they happened in different years)?
JL: The date the donor has transferred title to the charity.
Kars4Kids: If a person has two cars to donate in the same year, would you advise they break the car donations up over two years or donate them both in the same tax year?
JL: They should consult their CPA for tax planning to determine the answer.
Kars4Kids: Can a car that is in a spouse’s name be used as a deduction for a couple filing jointly?
JL: Yes. When a couple is filing a married filing joint tax return it would not matter whose name the vehicle is registered. If the couple elects to file as married filing separately, there are additional restrictions and considerations that are important to consider. Taxpayers who file married separate returns need to consult with their CPA for tax planning.
Kars4Kids: Does donating a car make sense for someone who is looking to lower his tax bracket?
JL: Probably, however the person should consult their CPA for tax planning to determine the overall benefit to be received and what other options are available to them.
Kars4Kids: Do you find car donation deductions to be red flags for an IRS audit?
JL: The fact that the IRS has issued new regulations in this area in the past few years is an indication that they believe there has been abuse with donations of vehicles. However, if a taxpayer is making a legitimate contribution to a reputable charity and both are prepared to fully comply with the IRS regulations, the taxpayer should not be concerned about donating a vehicle and claiming the deduction.
As indicated earlier, the new regulations by the IRS have implemented a method for them to match contributions reported by charities to the deductions claimed by a taxpayer. If those amounts do not match, the taxpayer should expect to receive correspondence from the IRS.
One particular abuse the IRS has made note of is the over valuation of a vehicle in light of the condition of the vehicle. It has been reported that some charities were soliciting vehicles in any condition and promising the donor Blue Book value for their contribution. Hence the IRS addresses this issue in the revised guidance to indicate that the value must be based on the condition of the vehicle donated, and if the vehicle is subsequently sold by the organization, then they must report that to both the IRS and the donor. It would appear the intent with this provision is to identify if a person is trying to take a deduction that is based on a vehicle in prime operating condition but is sold for scrap metal by the charitable organization.
Kars4Kids: Are there some types of charities, social, religious or educational, that a car donor can deduct more for?
JL: No the exempt purpose of the charity will not make a difference. For a taxpayer to receive a charitable contribution whether the contribution is in cash or noncash, the charity generally must be a church or have obtained the 501(c)(3) exemption status from the IRS.
Kars4Kids: Many charities offer free gifts to donors, can some of these gifts affect the eligibility of the tax deduction? Or the amount that the donor can deduct? If so, which specific types gifts can affect the eligibility of the tax deduction?
JL: A charitable organization that receives a contribution in excess of $75 and provides goods or services to the donor must provide a written statement to the donor that informs the donor that the amount of the charitable contribution that will be deductible is limited to the excess of the value of the vehicle over the value of the goods or services provided by the organization to the donor. The charitable organization must provide the donor with a good-faith estimate of the value of those goods or services.
Kars4Kids: How often do you advise clients that they should give to charity to save themselves money?
JL: It depends on their specific circumstances for the year including the amount of their income and the amount of their other deductions including prior charitable contributions.
Kars4Kids: Have you seen an effect from the IRS limit of up to $500 in that there has been a decrease in car donations?
JL: There had been an increased emphasis by charities to make donations of vehicles prior to the new regulations. It appears that many charities have decided that this area is more complex than they wish to deal with after the new regulations.
Kars4Kids: What is the most common question/concern/problem you hear from clients in regard to car donation?
JL: How to determine the value and confirming that they have all the required documents from the charity to support the contribution deduction.
Kars4Kids: Can a business that depreciates their vehicle fleet annually, still donate and deduct full sale value?
JL: Generally, no. This is a highly complex issue and the business owner should consult with their CPA prior to considering this.
Kars4kids is a national car donation charity. For more information visit the Kars4Kids website or like Kars4Kids on Facebook.