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Rules for Deducting the Contribution of Vehicles

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:

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.