Interview: Tax Aspects of Donating a Car to Charity
While donating a car to a charity can get you a nice deduction, it can be complicated and confusing. Kars4Kids, a national car donation charity, interviewed Jerry Love, CPA, who has extensive experience consulting clients on donating cars to charities. This is a summary of the interview; the full interview can be found on AICPA.org.
Kars4Kids: How important is it for a donor to document the donation?
JL: The Internal Revenue Service has gotten very strict recently and will disallow deductions or impose fines if a vehicle donation is not documented properly.
Kars4Kids: What is the proper documentation that donors should get from the charity?
The regulations state that no deduction is allowed unless the taxpayer has attached 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.
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: How does one value the car? Is it from the eventual auction sale of the car? Or the 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 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: 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: 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 made 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: 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.