The IRS has published guidance to help taxpayers and charities comply with rules that are designed to eliminate abuses associated with the charitable contribution of vehicles.
One rule applies to how an allowable deduction is determined and another imposes penalties on a charity that furnishes a false or fraudulent acknowledgment of a contributed vehicle’s value.
Up to a deduction of $249, you simply need some evidence of the vehicle’s value and proof the charity received the vehicle. A claimed deduction of $250 to $499 requires a “contemporaneous written acknowledgment” (Form 1098-C) containing a good faith estimate of the vehicle’s value. The rules not only govern automobiles, they also apply to the valuation of aircraft and boats.
The penalty provisions in the law should certainly discourage casual accounting on the part of a charity. On the low-end, the penalty is the greater of the sales price of the vehicle or the highest individual rate applied to the acknowledged value. On the high-end, it is the greater of $5,000 or the highest tax rate applied to the value. When you donate a vehicle, you should not expect to receive confirmation of an inflated value from a charity.
When the value of the claimed deduction reaches $500 or more, the contemporaneous written acknowledgment must state either the proceeds of sale received by the charity or the fair market value. Fair market value may be used for the value only if the charity makes significant use of the vehicle, makes material improvements to it, or furnishes the vehicle to a needy person for less than its fair market value. That third qualifying use, furnishing the vehicle to a needy person for less than its fair market value, is not in the law. It was added by the IRS in the rule making process.
When the claimed deduction exceeds $5,000, in addition to a Form 1098-C, an independent appraisal is required to be filed with the Form 8283 used to report such gifts, and the value is still subject to the sales proceeds or significant-use limitation.
Let’s consider a few examples:
- Earl contributes his 1987 Ford pickup to the Salvation Army. They plan to use the truck, and Earl plans to claim a deduction of $300, so he needs a “contemporaneous written acknowledgment” from the Salvation Army of the $300 value. For its part, the Salvation Army must have some reasonable basis for the valuation, eg a used car price guide or a contract with a salvage company that supports the estimate of value. Earl’s charitable contribution will be $300.
- Karen inherits a 1986 Cal 32 from her Great Uncle Sidney. The classic sailboat, in perfect condition and with three sets of sails, is valued by an appraiser for the estate at $58,000. Karen doesn’t want the boat and gives it to the University of Miami, which agrees to use the boat in its Sailing and Navigation curriculum. The independent appraisal performed for the estate should be adequate to support Karen’s claimed deduction, but she still needs a receipt from the University and a statement of use. Her charitable contribution deduction will be $58,000.
- Hayden inherits a 2004 Cadillac from his grandfather, so he decides to donate his 2000 Dodge Caravan to his church. The church will use the vehicle to transport people to various church events—not just on Sunday, but during the week, including Senior Day, Scout Troop meetings and activities, day camps, mission trips, etc. The church must give Hayden a “contemporaneous written acknowledgment” for the value of his van and that value must be supported by market data specific to that model, with those options and that mileage in the geographic area where it will be used. Hayden’s charitable contribution deduction is the fair market value reported to him by the church.
- Barbara decides to buy a new car. She reads in her local newspaper about a fund raising campaign for a veteran’s organization and decides to give them her old car. The organization accepts the donation with the understanding that the car will be sold and the proceeds used by the charity. The veteran’s organization must give Barbara a written acknowledgment of the gift, stating the amount the vehicle was sold for, within 30 days of receiving the vehicle. Barbara’s charitable contribution deduction is limited to that amount.
It should come as no surprise that since the new rules took effect, charities report that vehicle donations are off 30 to 40 percent. Should you decide to make a contribution involving a vehicle, be sure to make arrangements to secure the 1098-C.