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Tax Deduction

Vehicle Donations and The Tax Law

Short Summary

Donors may deduct up to $500, or if the vehicle sells for more, the greater amount. If the vehicle is used in the charity’s mission (provided to a struggling family) the donor may deduct the “fair market value”.

More In-Depth Summary

Beginning January 1, 2005, new federal tax legislation governing vehicle donations goes into effect. The following is a summary of the new legislation contained in (HR 4520).

Under the new law, allowable deductions for charitable contributions of vehicles, boats and airplanes (collectively referred to as “assets” in this summary) for which the claimed value exceeds $500 will depend how the asset is used by the recipient charity. If the organization sells the asset without any significant intervening use or material improvement, the donor’s deduction is limited to the gross sales proceeds received by the charity. But, if the organization uses the asset in direct furtherance of its charitable purpose the donor may deduct the “fair market value” of the asset. (According to the IRS, the donor, not the recipient charity, must determine the “fair market value” which the IRS describes as the price that a willing buyer and willing seller would agree upon if neither were pressured to do so. Assistance with vehicle values can be found at Kelly Blue Book’s web site. Use private party value as a guide.

Examples: If a vehicle with a “fair market value” of $4000 is donated directly to the non-profit charity and the organization sells the vehicle for $1000, the donor can only deduct $1000. But, if for instance, the organization provides the vehicle to a disadvantaged person, the donor may deduct the full “fair market value” of $4000.

Substantiation requirements when the claimed value exceeds $500 are as follows: No deduction is allowed unless the donor receives a written acknowledgement from the charity. That document must include the name and taxpayer identification number (social security number) of the donor and the vehicle identification number (or similar number) of the asset. Additional documentation is required but is dependent on how the asset is used by the charity:

In the event the charity sells the asset without any significant intervening use or material improvement, the charity must send a written acknowledgement to the donor within 30 days of the sale certifying (1) that the asset was sold at an arms length transaction between unrelated parties, (2) the amount of the gross sales proceeds, and (3) include a warning that the donor’s deduction is limited to the sales proceeds.

If the charity intends to make significant use of the donated asset (such as providing a donated vehicle to a disadvantaged person) or make material improvements, the required written acknowledgement must be provided within 30 days of the contribution and must certify: (1) the intended use and duration of such use or the material improvements to be made and (2) that the asset will not be transferred in exchange for money, other property, or services before completion of such use or improvements.