IRS Issues New Rules Regarding Donating Vehicles to Charity

The IRS has issued guidance concerning the new rules for the deductibility and substantiation requirements relating to charitable contributions of vehicles. Beginning January 1, 2005, the deduction for the contribution of a vehicle in excess of $500 is limited to the actual sales price of the vehicle when it is sold by the charity. For this purpose, the IRS considers a vehicle a boat, an airplane or a motor vehicle used on public streets. Previously, the deduction was based only on the fair market value of the vehicle. For donations of $500 or less, the amount of the deduction will be the lesser of the fair market value or $500.

Example: On October 1, 2005, Mr. Smith contributes a vehicle with a fair market value of $1,300 to his favorite charity. On December 1, 2005, the charity sells the vehicle for $1,000. Mr. Smith's charitable deduction may not exceed $1,000.

There are three instances in which the donation will be its fair market value and will not be limited by the sales price:

If the vehicle is significantly improved prior to sale, the deduction will be the fair market value prior to improvements.

If the organization sells the vehicle at a price significantly below fair market value (or if it is gifted for no consideration) to a needy individual in direct furtherance of the donee organization's charitable purpose, the fair market value will be used.

The fair market value may be used, if the charity uses the vehicle to substantially further the organization's regularly conducted activities.
In the event that one of these situations applies, and the fair market value exceeds $5,000 for the vehicle, a qualified appraisal is required in order to claim the deduction.

In addition, the charity must provide acknowledgment of the donation and the deductibility of the property within 30 days after the later of the date of the donation or the sale of the vehicle. Since this guidance was recently issued, charitable organizations are not required to provide this information until October 1, 2005 for donations made prior to September 1, 2005. In addition, the organization will be required to file Form 1098-C with the IRS for contributions of vehicles. The form must be attached to the individuals return in order to take the deduction. Form 1098-C may be given to the donor by the organization in place of an acknowledgment letter.

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