Donating Cars to Charity - Beware of New Tax Rules
- By Salim Omar, CPA
- Published 09/23/2008
- Finances
- Unrated
Salim Omar, CPA
Salim Omar, author of "Straight Talk About Small Business Success In New Jersey" specializes in providing accounting and tax services to small business owners and professional practices in NJ. Salim's articles are featured in various national magazines including Accounting Today, The CPA Journal, Chiropractic Economics, Wealth Manager and The Two River Times. You may request a free copy of Salim's new special report titled "How To Drastically Reduce Your Taxes By As Much As 62% This Year Alone And Put Thousands Back In Your Pocket"
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It was on June 3, 2005 that the IRS released guidelines on donated vehicles as charitable contributions. This came after the American Jobs Creation Act (AJCA) radically changed how much of a deduction taxpayers can claim when they donate a car to a charity. For those wishing to donate a car, it is important to know the basics in order to ensure a proper tax deduction.
Fair market value vs. actual sales price
Initially, taxpayers were able to deduct the fair market value of a vehicle that they donated. The new law changes that. The law says that the amount the taxpayer may deduct is equal to the amount of money the charity sales the vehicle for. That is the point in which the charity provides written documentation to the donor and to the IRS that claims the amount of the deduction.
Limited exception
There are some limited exceptions provided by the AJCA in which the donor may have the ability to claim the fair market value of the vehicle. This occurs when the charity uses the vehicle for regular use such as delivering meals on wheels. In this case, the full fair market value can be deducted. Fortunately, there are a number of ways in which a charity can use a donated vehicle, but it has to be for a significant intervening use. For example: If the vehicle is used to transport items for the charity and it places 10,000 miles per year on the vehicle; that qualifies.
The donor can also claim
full fair market value as a deduction if the charity makes a substantial improvement to the vehicle. This is commonly referred to as a “material improvement.” This type of improvement involves taking care of major repairs or anything that increases the vehicle’s value. This doesn’t consist of just detailing the car or repainting it. Such tasks usually do not add much value to a car, if any at all.
IRS exemption
There is an IRS exemption that is not included in the AJCA. The IRS has determined that taxpayers have the ability to claim a deduction for the fair market value of a donated vehicle, if the charity decides to sell the vehicle at an extremely low price to an individual who is needy. This means that the sale price will be below the market value of the car. However, the sale must be one that furthers the purpose of the charity, which is helping a poor individual in need of a vehicle.
If you plan on using one of these exemptions, how exactly do you determine what the fair market value of the vehicle is? This is a good question since vehicle pricing guidelines can vary from publication-to-publication and between private-party, trade-in, and dealer retail prices. In this case, the IRS considers the fair market value to be no higher than the private-party sale price.
Unfortunately, the provisions set forth by the American Jobs Creation Act makes donating a car less attractive. However, the available exemptions can still help create a reasonable deduction while still lending a helping hand to the less fortunate.
Fair market value vs. actual sales price
Initially, taxpayers were able to deduct the fair market value of a vehicle that they donated. The new law changes that. The law says that the amount the taxpayer may deduct is equal to the amount of money the charity sales the vehicle for. That is the point in which the charity provides written documentation to the donor and to the IRS that claims the amount of the deduction.
Limited exception
There are some limited exceptions provided by the AJCA in which the donor may have the ability to claim the fair market value of the vehicle. This occurs when the charity uses the vehicle for regular use such as delivering meals on wheels. In this case, the full fair market value can be deducted. Fortunately, there are a number of ways in which a charity can use a donated vehicle, but it has to be for a significant intervening use. For example: If the vehicle is used to transport items for the charity and it places 10,000 miles per year on the vehicle; that qualifies.
The donor can also claim
IRS exemption
There is an IRS exemption that is not included in the AJCA. The IRS has determined that taxpayers have the ability to claim a deduction for the fair market value of a donated vehicle, if the charity decides to sell the vehicle at an extremely low price to an individual who is needy. This means that the sale price will be below the market value of the car. However, the sale must be one that furthers the purpose of the charity, which is helping a poor individual in need of a vehicle.
If you plan on using one of these exemptions, how exactly do you determine what the fair market value of the vehicle is? This is a good question since vehicle pricing guidelines can vary from publication-to-publication and between private-party, trade-in, and dealer retail prices. In this case, the IRS considers the fair market value to be no higher than the private-party sale price.
Unfortunately, the provisions set forth by the American Jobs Creation Act makes donating a car less attractive. However, the available exemptions can still help create a reasonable deduction while still lending a helping hand to the less fortunate.