Sometimes charitably-inclined individuals will consider donating their antique automobile collection, a boat or even a private plane to charity. The tax rules for donations of non-cash assets are generally favorable and can result in a large tax savings for some donors. However, the rules for these types of donations are a bit complex.
The American Jobs Creation Act of 2004 limited taxpayers’ deductions for donated cars, boats or planes that have a value greater than $500. Before this legislation, taxpayers could deduct the published fair market value for the car, boat, or plane. This policy was clearly vulnerable to abuse by taxpayers and gave rise to the Blue Book Scam. It went something like this: Donor has a non-working, rusted out 1974 Chevy with two working wheels in a farm field. A valuation guide says it is worth $3,200 so they donate it to charity and claim that full value deduction. Then the charity would outsource the donation to a scrap dealer and was lucky to get a check for $100 when all is said and done. Today, under the Act, taxpayers’ deductions are determined by the amount that the vehicle sale is eventually received by the charity.
In analyzing how to take the deduction amount for a donated vehicle, taxpayers will have to first determine whether the charity disposed of the car like any other seller, or for a charitable purpose. If the charity merely sells the car at an auction, the taxpayer will use the gross proceeds amount that the car sold for rather than the fair market value of the car. However, for cars selling for less than $500, IRS regulations allow for a deduction of $500 or the car’s fair market value, whichever is less.
On the other hand, if a charity disposes of the automobile in a manner carved out by IRS gross proceeds rules, the taxpayer may be able to deduct the vehicle’s fair market value. These exceptions allowing for the fair market value deduction include acknowledgments from the charity recipient detailing: 1) the charity’s use of the vehicle, 2) its intention to make a material improvement to the vehicle, 3) its intention to give the vehicle to a needy individual at a discounted price, or 4) the special rule for vehicles selling less than $500.
In addition to determining the amount for the charitable deduction, the taxpayer donating a vehicle to charity will also need to make sure that the charity recipient qualifies as a 501(c)(3) organization to ensure that the donation is tax deductible. In working alongside the qualified charity, the taxpayer must then ensure that both parties meet IRS recordkeeping and filing requirements. These regulations require receipt of an acknowledgment from the qualified charity for the donation and IRS Form 1098-C, filing IRS Form 8283 for vehicle deduction claim of $500 or more, and the obtaining of a written appraisal for the donated property from a qualified appraisal. For more details regarding donations of vehicles to charity and IRS requirements surrounding such gifts, donors should see the IRS’ Donor’s Guide to Vehicle donations at Publication 4303 (Rev. 1-2015) (irs.gov).