A Yellow Light for Car Donations

2005 Winter Issue

It’s no secret that the IRS and Congress are concerned about many car donation programs run by charitable organizations. They’ve often expressed concern that donors claim inflated charitable deductions for cars that are sold for much less by the charity. Earlier this year, the IRS issued guidance to both charities and donors to describe the rules that relate to these donation programs. Much of this guidance has now been rendered obsolete by the passage of the American Jobs Creation Act of 2004.

This Act, which was signed into law at the end of October, includes provisions that make important changes both to the deductions that are available to donors of certain assets, as well as to the recordkeeping and disclosure requirements of the recipient charities. These changes are effective for contributions made after Dec. 31, 2004.

If the deduction claimed for the donation of a “qualified vehicle” exceeds $500, the donor will be subject to new substantiation requirements. A “qualified vehicle” includes most motor vehicles, boats, and aircraft. It’s important to note that the substantiation requirements differ depending on whether the charity retains the vehicle to be used in its exempt purpose or sells the vehicle with no intervening use by the charity.

In order to claim a deduction, a written acknowledgement must be provided by the charity to the donor within 30 days of:

1. The contribution of the vehicle, or
2. The date the charity sells the vehicle, if it’s sold without any significant intervening use or material improvement.

The acknowledgement must contain the name and identification number of the donor, as well as the vehicle identification number. If the charity sells the vehicle without any significant intervening use, they must also provide the donor with the following information:

1. Certification that the vehicle was sold at arm’s length to an unrelated party.
2. The gross proceeds of the sale.
3. A statement that the donor’s deduction may not exceed the gross proceeds.

If, instead, the charity retains the vehicle for use in its exempt purpose, it must provide the donor with the following information:

1. A statement indicating the intended use of the vehicle, and the intended duration of its use.
2. Certification that the vehicle will not be sold before the charity’s completion of its intended use of the vehicle.

Donors will be required to include the written acknowledgement with the tax return that includes the deduction for the vehicle contribution. As described above, if the vehicle is sold by the charity with no significant intervening use, the donor’s deduction will be limited to the sales proceeds received by the charity.

Charities operating car donation programs will want to carefully review the detailed requirements of these new rules and determine how they’ll comply with them. If you need assistance with evaluating or implementing these new requirements, please contact your Plante & Moran representative.