Gregory S. DuPont
Tax Act Tightens Rules on Vehicle Donations
Fundraising through vehicle donation programs took a hit when the American Jobs Creation Act was passed in October 2004. In a revenue-raising measure, this legislation places new restrictions on the charitable deductions taxpayers can claim for vehicle donations and increases the reporting obligations of recipient charities. The new rules apply to donations made on January 1, 2005 or later.
Prior to AJCA, taxpayers could write off the fair market value of the car regardless of the amount the charity received for the car. With the reform, donors are now only allowed to deduct the amount the charity sells the vehicle for. In many cases this will decrease the amount taxpayers will be allowed to deduct, because charities often wholesale donated cars and receive less than market value.
Taxpayers can generally deduct the vehicle’s fair market value if the charity intends to make “significantly intervening use” of the car or “materially improve” it. The IRS defines significant intervening use as use that substantially furthers a charity’s regularly conducted activities. Incidental use does not qualify. Qualifying material improvements are restoration or repairs that significantly increase the car’s value. Routine maintenance, cleaning, and minor repairs do not qualify.
For donations worth more than $500, charities are required to provide donors with written acknowledgements. Without it, the donor will not be able to deduct the contribution. How a charity manages a donation will affect what must be reported to the donor; furthermore, any acknowledgement of a vehicle by a charity must also be reported to the IRS.
An acknowledgement must include the donor’s name, taxpayer identification number, and the vehicle identification number, as well information based on one of the following three circumstances:
- Sale. When a charity sells a donated vehicle, the acknowledgement must include a statement certifying that the car was sold in an arm’s length transaction between unrelated parties and that the donor may not deduct more than the gross proceeds from the sale. The dollar amount of the gross proceeds from the sale must be noted.
- Use. If a charity intends significant intervening use of a donated vehicle, the acknowledgement must include a statement certifying the intended use and the duration of that use. The charity must also state that it will not sell the car before completion of that use.
- Improvement. If a charity intends to make material improvements to a vehicle, the acknowledgement must include a statement certifying the intended material improvement and that the charity will not sell the car before completion of the improvement.
In addition to stipulating what must be reported, the IRS also specifies when the acknowledgement must be provided. When a charity sells a vehicle, it must provide the donor with the acknowledgement within 30 days of the sell date. Should a charity choose to use a vehicle or make material improvements, the charity must provide the donor with an acknowledgement within 30 days of the donation.
The IRS is expected to issue further guidance on the new rules to clarify some ambiguities. It is clear, however, that failure to comply with the new rules could result in penalties. To help ensure a smooth transition, give us a call for specific guidance.