Key point. Persons who contribute a car to a charity that is sold without significant use cannot claim the fair market value of the car as a charitable contribution deduction. Instead, their deduction is limited to the gross proceeds received by the charity from the sale.
Key point. The purpose of the vehicle donation rules is to address the chronic problem of donors greatly inflating the value of vehicles they donate to charity. Limiting a deduction to the sales proceeds received by a charity upon selling a donated car (assuming no significant use by the charity) will reduce or eliminate the incentive of donors to inflate the value of donated cars.
The American Jobs Creation Act of 2004 changed the rules for claiming a charitable contribution deduction for donations of used vehicles to charity. The new rules took effect in 2005. It is important for church leaders to be familiar with the new rules for two reasons. First, churches have reporting requirements that must be followed; and second, church leaders need to be ready to explain the rules to members who indicate an interest in donating a car (or a boat or plane) to the church.
Key point. This article addresses the substantiation requirements that apply to donations of cars valued by the donor at more than $500. The same rules apply to donations of boats and planes.
The charity sells the donated car with no significant use or material improvement
Beginning in 2005, if the claimed value of a donated car exceeds $500 and the car is sold by the charity, the donor’s charitable contribution deduction is limited to the gross proceeds from the sale. Prior to 2005 taxpayers could deduct the fair market value of a donated car. Under the new rules, the charity must:
(1) provide the donor with a contemporaneous written acknowledgement within 30 days of the sale containing the following information:
- donor’s name and social security number
- date of contribution
- vehicle identification number
- date of sale
- a certification that the vehicle was sold in an arm’s length transaction
- a statement of the gross proceeds from the sale
- a statement that the deductible amount may not exceed the amount of the gross proceeds
(2) submit the same information to the IRS by February 28 of the following year.
A charity must use IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) to provide the required information to the IRS. It may use the same form to provide a contemporaneous written acknowledgment to the donor.
Car sold at a price significantly below fair market value (or gratuitously transferred) to a needy individual in direct furtherance of the charity’s exempt purpose
The gross proceeds limitation does not apply to a sale of a car to a needy individual at a price significantly below fair market value, or a gratuitous transfer to a needy individual, in direct furtherance of a charitable purpose of the donee organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
Key point. Application of the proceeds from the sale of a qualified vehicle to a needy individual to any charitable purpose does not directly further a donee organization’s charitable purpose within the meaning of this rule.
A charity must:
(1) provide the donor with a contemporaneous written acknowledgement within 30 days of the date of contribution containing the following information:
- donor’s name and social security number
- date of contribution
- vehicle identification number
- a certification that the charity will sell the qualified 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
(2) submit the same information to the IRS by February 28 of the following year.
A church must use IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) to provide the required information to the IRS. It may use the same form to provide a “contemporaneous written acknowledgment” to the donor.
Significant use or material alteration of the donated car
If the claimed value of a donated car exceeds $500 and the charity “significantly uses or materially improves” the car, the donor may be able to deduct the car’s market value. In addition, the charity has the following reporting requirements:
(1) provide the donor with a “contemporaneous written acknowledgement” within 30 days of the date of the contribution containing the following information:
- donor’s name and social security number
- date of contribution
- vehicle identification number
- a certification and detailed description of (a) the intended significant intervening use by the charity and the intended duration of the use, or (b) the intended material improvement by the charity; and (2) a certification that the qualified vehicle will not be sold before completion of the use or improvement.
(2) submit the same information to the IRS by February 28 of the following year.
A church must use IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) to provide the required information to the IRS. It may use the same form to provide a “contemporaneous written acknowledgment” to the donor.
Key point. A qualified appraisal is required for a deduction in excess of $5,000 for a qualified vehicle if the deduction is not limited to gross proceeds from the sale of the vehicle.
To constitute a significant intervening use, a charity must actually use the donated car to substantially further its regularly conducted activities, and the use must be significant. Incidental use is not a significant intervening use. Whether a use is a significant intervening use depends on its nature, extent, frequency, and duration.
Material improvement includes a major repair or improvement that improves the condition of a car in a manner that significantly increases the value. To be a material improvement, the improvement may not be funded by an additional payment to the donee organization from the donor of the qualified vehicle. Services that are not considered material improvements include application of paint or other types of finishes (such as rustproofing or wax); removal of dents and scratches; cleaning or repair of upholstery; and installation of theft deterrent devices.
A donor claiming a deduction for the fair market value of a car must be able to substantiate the fair market value. A reasonable method of determining fair market value is by reference to an established used vehicle pricing guide. A used vehicle pricing guide establishes the fair market value of a particular vehicle only if the guide lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or substantially similar options or accessories, and with the same or substantially similar warranties or guarantees, as the vehicle in question.
Example. On October 1, 2005, Don contributes a vehicle with a fair market value of $2,500 to his church. On December 1, 2005, the vehicle is sold without any significant intervening use or material improvement. Gross proceeds from the sale are $1,000, and Don’s charitable contribution deduction will be limited to this amount. The church must provide Don with a “contemporaneous written acknowledgment” of the donation by December 31, 2005. It may use IRS Form 1098-C to ensure that it has met all of the requirements for a contemporaneous written acknowledgement issued to the donor. It must use Form 1098-C to provide the same information to the IRS, by February 28, 2006. You may obtain this form from the IRS website (www.irs.gov).
Example.Same facts as the previous example except that the church plans to use the donated car several times a week in the course of church activities. If the church “significantly uses” the car, it must certify this intended use (and duration) and provide a written acknowledgement to Don within 30 days of the contribution. The church may use IRS Form 1098-C to comply with these requirements. It must use Form 1098-C to provide the same information to the IRS, by February 28, 2006. Don’s charitable contribution deduction will be the fair market value of the car.
Example.On October 1, 2005, Carrie contributes a used car to a charity whose exempt purposes include helping needy individuals who are unemployed develop new job skills, finding job placements for these individuals, and providing transportation for these individuals who need a means of transportation to jobs in areas not served by public transportation. The charity determines that, in direct furtherance of its charitable purpose, it will sell the qualified vehicle at a price significantly below fair market value to a trainee who needs a means of transportation to a new workplace. On or before October 31, 2005, the charity provides an acknowledgment to Carrie containing her name and taxpayer identification number, the vehicle identification number, a statement that the date of the contribution was October 1, 2005, a certification that it will sell the qualified vehicle to a needy individual at a price significantly below fair market value, and a certification that the sale is in direct furtherance of its charitable purpose.
Deductions of $500 or less
A donation of a car with a claimed value of at least $250 must be substantiated by a contemporaneous written acknowledgment of the contribution by the charity. For a donation of a car with a claimed value of at least $250 but not more than $500, the acknowledgment must contain the following information: the amount of cash and a description (but not value) of any property other than cash contributed; whether the donee organization provided any goods or services in consideration, in whole or in part, for the cash or property contributed; and a description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the contribution, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
If a donor contributes a car that is sold by the charity without any significant intervening use or material improvement, 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 vehicle on the date of the contribution or $500. 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 appropriate acknowledgment from the charity.
Penalties
The tax code imposes penalties on any charity required to furnish an acknowledgment to a donor that knowingly furnishes a false or fraudulent acknowledgment, or knowingly fails to furnish an acknowledgment in the manner, at the time, and showing the information required under the rules summarized above. For example, the penalty applicable to an acknowledgment relating to the sale of a donated car is the greater of (1) the product of the highest individual income tax rate (currently 35%) and the sales price stated on the acknowledgment, or (2) the gross proceeds from the sale of the qualified vehicle. The penalty applicable to an acknowledgment relating to any other qualified vehicle the claimed value of which is more than $500 is the greater of (1) the product of the highest individual income tax rate and the claimed value of the qualified vehicle, or (2) $5,000.
This article first appeared in Church Treasurer Alert, November 2005.
