As the end of the year approaches, many individuals contemplate donating a vehicle to charity before December 31st, but are usually unaware of the variety of pitfalls common to first-time vehicle donors. The following article briefly presents and addresses frequently-asked questions relating to vehicle donations that individuals should understand as they consider donating a vehicle to charity:
What type of vehicle can I donate?
Under IRC § 170, a “qualified vehicle” includes:
- Any “motor vehicle manufactured primarily for use on public streets, roads, and highways” (includes cars, pickup trucks, RVs, etc.);
- Boats; and
- Airplanes.
What form of documentation should I receive from the charity?
If the claimed value of the vehicle exceeds $500, the individual is not allowed a charitable deduction unless he/she:
1. Substantiates the contribution by obtaining a “contemporaneous” written acknowledgement from the charitable organization containing specified information and certifications; and
2. Includes the acknowledgement with the tax return on which the deduction is claimed.
“Contemporaneous” means that the charity must provide the individual with the acknowledgement within 30 days of the sale (by the charity) or contribution (by the individual) of the vehicle (depending on the use of the vehicle, as explained below). The charity may provide an acknowledgement in any reasonable manner, such as a letter on its own letterhead or using a copy of Form 1098-C.
Does it matter what the charity intends to do with my vehicle?
Yes! The required contents of the acknowledgement and the amount of the deduction are determined by what the charity does with the vehicle.
If the charity:
1. Sells the contributed vehicle without any significant use or material improvement, the acknowledgment must contain the following information:
a. the individual’s name and taxpayer identification number (TIN);
b. the date of the contribution;
c. the vehicle identification number (VIN) or similar number, i.e. the hull ID number for a boat or the aircraft ID number for an airplane;
d. a certification that the vehicle was sold in an arm’s length transaction between unrelated parties;
e. the date the vehicle was sold;
f. the gross proceeds from the sale;
g. a statement that the deductible amount can’t exceed the amount of the gross proceeds
h. whether the charity provided any goods or services in consideration, in whole or in part, for the qualified vehicle, and a description and good-faith estimate of the value of those goods or services.
2. Intends to make a significant use of, or material improvement to, the contributed vehicle prior to a subsequent sale the acknowledgement must contain the following information.
a. the individual’s name and taxpayer identification number (TIN);
b. the date of the contribution;
c. the vehicle identification number (VIN); or similar number,
d. a certification, and detailed description, of the intended use or material improvement of the vehicle and the intended duration of that use;
e. a certification that the vehicle won’t be transferred in exchange for money, other property , or services before completion of that use or improvement;
f. whether the charity provided any goods or services in consideration, in whole or in part, for the qualified vehicle, and a description and good-faith estimate of the value of those goods or services.
3. In furtherance of the charity’s purposes relieving the poor and underprivileged who are in needs of a means of transportation, intends to give the vehicle outright to, or at a price significantly below fair market value, sell it to, a needy individual, the acknowledgment must contain the following information.
a. the individual’s name and taxpayer identification number (TIN);
b. the date of the contribution;
c. the vehicle identification number (VIN) or similar number,
d. a certification that the charity will sell the qualified vehicle to a needy individual at a price significantly below FMV (or, give the vehicle to a needy individual) and that the sale (or gift) will be in direct furtherance of the charity’s charitable purpose of relieving the poor and distressed or the underprivileged who are in needs of a means of transportation;
e. whether the charity provided any goods or services in consideration, in whole or in part, for the vehicle, and a description and good-faith estimate of the value of those goods or services.
Do I need to get an appraisal on my vehicle?
It depends. For donations valued over $5,000, a qualified appraisal of the vehicle conducted by a qualified appraiser is required; however, if the charity sells the vehicle without significant use or material improvement (see #1 above), a qualified appraisal is not required as long as the acknowledgement is complete.
Isn’t my deduction equal to the fair market value of my vehicle?
Maybe. If the charity intends to make significant use of or materially improve the vehicle, or transfer the vehicle to a needy individual (see #2 and #3 above, respectively), then the deduction amount may be equal to the FMV of the vehicle. However, if the charity sells the vehicle without significant use or material improvement (see #1 above), the amount of the deduction allowed may not exceed the gross proceeds received from the sale of the vehicle, regardless of the FMV or blue book value of the vehicle.
When can I take the deduction? The deduction must be taken in the year in which the donation was made. If an individual donated a qualified vehicle in Year 1, then he must take the deduction in that year, even if the charity doesn’t sell the vehicle until a later year. If the individual hasn’t received written acknowledgement when he intends to file his Year 1 return, then he can’t claim the deduction on his return, but he can claim it on an amended return for Year 1 to which he attaches the acknowledgement. In this case, generally the individual can file an extension for his Year 1 return, make an extension payment if he anticipates owing tax and then wait to file his return until the charity provides written acknowledgement.
Donating a vehicle is a great way for an individual to support a favorable charity, obtain a deduction on their income tax return and avoid the hassle of selling the vehicle. Knowing what to expect can take a lot of the frustration and misunderstanding out of what should be a positive experience for both the individual and the charity.