Church treasurers should be familiar with new rules governing the donation of vehicles to charity. These rules assume that the claimed value of the donated vehicle exceeds $500. The rules are summarized in the following table. They apply to donations of cars, boats, and planes.
Donations of Vehicles to Charity
RuleForm of donationAmount of charitable contribution deductionCharity’s obligations
| 1 | A taxpayer donates a vehicle to a charity, and the charity sells it without any significant use or material improvement. | • Gross proceeds received by the charity from the sale of the vehicle.
• No deduction is allowed unless a donor itemizes expenses on Schedule A, and attaches a “written acknowledgment” (described in next column) or Form 1098-C to the tax return claiming the deduction. | • Provide the donor with a written acknowledgment within 30 days of the sale, containing donor’s name and social security number, vehicle identification number, date of contribution, date of sale, the gross proceeds from the sale, a certification that the vehicle was sold in an “arm’s length transaction” to an unrelated party, and a statement that the deductible amount may not exceed the amount of the gross proceeds from the sale.
• IRS Form 1098-C may be used as a written acknowledgment (if provided to the donor within 30 days of the sale). • Submit Form 1098-C to the IRS by February 28 of the following year. |
| 2 | A taxpayer donates a vehicle to a charity, and the charity “significantly uses” the vehicle (e.g., regular use over an extended period of time in performing the charity’s exempt purposes). | • Fair market value of the donated vehicle.
• A qualified appraisal, and appraisal summary (Form 8283), is required for a deduction in excess of $5,000 for a vehicle if the deduction is not limited to gross proceeds from the sale of the vehicle. • No deduction is allowed unless a donor itemizes expenses on Schedule A, and attaches a “written acknowledgment” (described in next column) or Form 1098-C to the tax return claiming the deduction. | • Provide the donor with a written acknowledgment within 30 days of the contribution, containing donor’s name and social security number, vehicle identification number, date of contribution, and a certification and description of (1) the intended significant intervening use by the charity and the intended duration of the use, and (2) a certification that the vehicle will not be sold before completion of the use.
• IRS Form 1098-C may be used as a written acknowledgment (if provided to the donor within 30 days of the contribution). • Submit Form 1098-C to the IRS by February 28 of the following year. |
| 3 | A taxpayer donates a vehicle to a charity, and the charity “materially improves” the vehicle (e.g., major repairs that significantly increase the vehicle’s value). | Same as Rule 2. | • Provide the donor with a written acknowledgment within 30 days of the contribution, containing donor’s name and social security number, vehicle identification number, date of contribution, and a certification and description of (1) the intended material improvement by the charity, and (2) a certification that the vehicle will not be sold before completion of the improvement.
• IRS Form 1098-C may be used as a written acknowledgment (if provided to the donor within 30 days of the contribution). • Submit Form 1098-C to the IRS by February 28 of the following year. |
| 4 | A taxpayer donates a vehicle to a charity, and the charity transfers it to a needy person for significantly below market value in furtherance of its charitable purposes. | Same as Rule 2. | • Provide the donor with a written acknowledgment within 30 days of the contribution, containing donor’s name and social security number, vehicle identification number, date of contribution, and a certification that the charity will sell the vehicle to a needy individual at a price significantly below fair market value (or, if applicable, that it will gratuitously transfer the vehicle to a needy individual) and that the sale (or transfer) will be in direct furtherance of the charity’s exempt purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
• IRS Form 1098-C may be used as a written acknowledgment (if provided to the donor within 30 days of the contribution). • Submit Form 1098-C to the IRS by February 28 of the following year. |
A recent IRS “news release” provides clarification on three issues:
(1) Date of sale. Questions have arisen as to whether the charity must sell a donated vehicle in 2005 in order for the donor who donated a vehicle in 2005 to receive a deduction for 2005. An IRS news release states that a charity does not need to sell the vehicle in 2005. A taxpayer can take a charitable contribution deduction only for the year the vehicle is transferred to the charity, even if the vehicle is not sold by the charity until a later year.
(2) Acknowledgment received after filing tax return. If a person who donates a vehicle to charity receives a written acknowledgment after filing the tax return for the year of the donation, he or she may, after receiving the acknowledgment, file an amended return for that year and claim the deduction on the amended return. The acknowledgment must be attached to the amended return.
(3) Auctions. Some charities are selling donated vehicles at auction and claiming that the sales are to “needy individuals” at prices significantly below fair market value. By doing so, these charities have claimed that the sales trigger an exception to the general rule that the deduction allowed to the donor is limited to the proceeds from the charity’s sale. The IRS position is that vehicles sold at auction are not sold at prices significantly below fair market value. Therefore, the IRS will not treat vehicles sold at auction as qualifying for the exception for sales to needy individuals at prices below fair market value. Charities that sell a donated vehicle at auction and provide the donor with an acknowledgment that indicates anything other than that the deduction may not exceed the gross proceeds from the sale may be subject to penalties. IRS News Release IR-2005-149.
This article first appeared in Church Treasurer Alert, February 2006.
