In an effort to further their charitable mission, not-for-profit organizations routinely seek contributions from the communities they serve. To this end, many not-for-profit organizations have adopted vehicle donation programs. While these programs—usually operated in association with a for-profit entity (often a car dealer) that coordinates the donations—are often a boon for charities, they are not without risk.
To maximize the effectiveness of car (and truck, boat, RV and other vehicle) donation programs, as well as help potential donors get the most out of their charitable intent, not-for-profits should adhere to IRS guidance and industry best practices. First and foremost, not-for-profits should have in place a formal, written donation policy that outlines its approach to non-cash charitable contributions. And second, the charity should be mindful of the tax benefits to their donors in order to maximize their potential charitable contributions.
Tax benefits vary greatly depending on not only the value of the donated asset, but also on the way in which the charity intends to use it. For example, a charity may elect to use a donated vehicle in its exempt purpose for transportation or for hauling goods, or it may choose to give it to someone in need who will use it for personal transportation. In these scenarios, the donor receives a tax deduction for the Fair Market Value (FMV) of the vehicle, usually determined by a third party such as Kelley Blue Book (www.kbb.com). However, donated cars often are sold wholesale (as cars or as parts) to raise funds for the charity. Since charities are not in the auto business, they generally have a dealer—the for-profit partner referenced earlier—handle the sale. In such cases, the charity is likely to receive a flat fee per car, typically well below market value.
According to IRS rules, the donor's tax deduction for a car donation is usually limited to the price at which the charity sold the car – not the market value of the car. It is not unheard of for dealers to dump these cars cheaply, paying the charity less than $50 per vehicle. The donor’s tax deduction in turn would be infinitesimal, so this practice certainly would dissuade most potential benefactors from donating autos.
Donors may claim a deduction of the vehicle's FMV only if:
- The charity makes a “significant intervening use” of the vehicle, such as using it in a program such as delivering meals on wheels.
- The charity makes a material improvement to the vehicle, such as a major repair that significantly increases its value.
- The charity furthers its mission by donating or selling the vehicle directly to a needy individual—even at a significantly below-market price. However, the recipient must truly need the vehicle and use it as a means of transportation, not as an asset to re-sell for cash.
So, what can charities do to make their car donation programs most appealing, and what responsibilities fall upon donors looking to hand over their keys?
Work effectively with a for-profit partner
The not-for-profit should establish an agency relationship with a for-profit entity assisting with the donations that clearly states that the car donation program is for the benefit of the not-for-profit. That means the charity should have oversight of the program, just as it has oversight over any other form of charitable contribution. This includes the authority to review all contracts related to the program, choose the program operators, approve all advertising relating to the program and review all recordkeeping related to the program.
Some arrangements between a charity and a for-profit entity—such as situations where the charity receives either a flat-fee from the proceeds or a percentage of the sales of the vehicles—expose the charity to too much risk. In these scenarios, the charity has no control over the for-profit’s activities related to the cars, and the donors’ “contributions” are made directly to the for-profit organization rather than to the not-for-profit entity. It is prudent to avoid these situations.
In lieu of working with a for-profit partner, the charity initially receiving the vehicle donation could sell the vehicle to another non-profit which intends to significantly use, materially improve or directly locate a needy individual.
Beware of UBTI
Because vehicle-donation programs can raise unrelated business income tax (UBTI) concerns—and in turn require the organization to file a 990-T business income tax return—not-for-profits should be cautious about the types of benefits they provide their donors in exchange for contributions. Beyond triggering UBTI concerns, some benefits can diminish the amount of charitable deductions donors can take on their tax returns.
Provide written acknowledgement
Contributions of large items—motor vehicles, boats, and airplanes—trigger the need for written acknowledgments. When organizations receive a car, they must issue the donor a Form 1098-C to provide this written acknowledgment (provided that the donation’s value exceeds $500). Form 1098-C must include the donor’s name and taxpayer ID, the vehicle identification number, the date of the contribution and a statement that the organization provided no goods or services in exchange for the vehicle. The written acknowledgment must also contain the date of the sale, the sale’s gross proceeds and a statement that the donor’s deduction may not exceed the proceeds from the sale. If the donor did receive a benefit, the organization must include a good faith valuation of those services. The acknowledgment must be provided within 30 days of the contribution or the disposition. The donor then files this written acknowledgement along with its tax return.
Should an organization decide to use a donated vehicle it must specify in a “significant intervening use” statement how this use supports its charitable mission, how the organization intends to use the vehicle, and the length of time the organization plans to use the vehicle, as well as a provision stating that the organization will not sell the vehicle before this predetermined length of time expires. Note that not-for-profits are not required to provide a significant intervening use statement if the use of the vehicle is incidental or if the organization decides to use the vehicle after the time of the contribution.
(These rules are spelled out in IRS Notice 2006-1. Within the IRS Tax Code, Section 170(f)(12) contains the rules for determining the amount that a donor may deduct for giving a qualified vehicle with a claimed value greater than $500, as well as related substantiation and information reporting requirements. Section 6720 imposes penalties on any organization that receives a contribution of a qualified vehicle and knowingly furnishes a false or fraudulent acknowledgment of the contribution to the donor, or knowingly fails to furnish the acknowledgment.)
Express your charitable mission
In all marketing efforts, clearly let donors know how their donations will support your mission and programs, and stress that donations are tax deductible. Your website should contain a Donate Now page where visitors can learn the specifics of donating their vehicles, as well as a page entitled “Other Ways to Give” to provide information about additional ways to support your charity, such as becoming a member, monthly giving programs, gift donation programs, workplace giving, and planned giving. This page should include guidance, or a link to a website that offers guidance, on how to determine FMV for donations. If you have positive ratings from Charity Navigator or the BBB be sure to highlight that fact.
Donors only reap tax benefits if they contribute to an eligible organization - one that has obtained exemption under one of the paragraphs of IRS code section §501(c), typically paragraph (3). To verify an organization's qualified status, donors should review Exempt Organization (EO) Select Check which can be found on the IRS website at www.irs.gov, or contact the Public Charities Division at (617) 727-2200, or the IRS Tax Exempt/Government Entities Customer Service at (877) 829-5500. Additional information regarding an organization’s status, financial position and Form 990: Return of Organization Exempt from Income Tax can be found at www.guidestar.org to assist donors in making their donation decisions. (Note that churches, synagogues, temples, mosques, and governments are not required to register with the Non-Profit Organizations/Public Charities Division or to apply to the IRS for tax-exempt determination. While they may not be listed in EO Select Check, donations to these institutions are tax deductible.) Additional information can be found in the instructions of the Form 1098-C and Form 8283 as well as Publication 526 Charitable Contributions.
Further, donors are required to document their eligible charitable contributions. Charitable organizations should remind donors to keep a record of their contributions and any written acknowledgements that accompanied those contributions, as well as encourage donors to seek counsel from a tax specialist to determine how best to maximize the deduction benefits from their charitable contributions.
An assignment of title should be made only to the charity or an authorized private, for-profit agent of the charity. The for-profit agent of the charity should be subject to the charity’s oversight in order for the agency to be valid for tax-deductibility purposes.
Donor responsibilities for each level of tax benefit are as follows:
Claiming $500 or less
No substantiation is required, assuming other non-cash contributions during the tax year don’t total over $500 when including the vehicle donation.
Claiming more than $500 but less than $5,000
Donors must attach a written acknowledgment or Tax Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to their tax return. The acknowledgment must include the donor’s name and taxpayer identification number, the date of the contribution, the vehicle identification number, gross proceeds of the sale, and a statement certifying the vehicle was sold in an arm's length transaction between unrelated parties. Donors must complete Section A of Tax Form 8283, Noncash Charitable Contributions, and attach it to Tax Form 1040.
Claiming more than $5,000
Donors must complete Section B of Tax Form 8283, which includes the signature of an authorized official of the non-profit, and attach it to your return. In addition, you must get a written appraisal of your vehicle. The written appraisal must be from a qualified appraiser. The appraisal must be made no more than 60 days before you donate the vehicle.
For more information, Notice 2006-1 provides detailed guidance on donor reporting obligations, including instructions on how, where, and when to report to the IRS the information contained in the contemporaneous written acknowledgment that the donee provides to the donor. It supplements the interim guidance issued in Notice 2005-44.
CBIZ Tofias Can Help
A thoughtful charitable contribution strategy helps not-for-profit organizations best leverage their charitable contributions by avoiding UBTI tax treatment, as well as helping potential donors benefit most from their contributions. Our specialists can assist organizations in establishing a formal contribution strategy or reviewing existing charitable contribution procedures. For further information, please contact us here.
Brian R. Jett, CPA is a Senior Tax Associate located in the St. Louis, MO office of CBIZ. He can be reached at 314.995.5596 or email@example.com.