Scenario A: It's got four wheels and an engine. Sometimes it even runs. But the mechanic's estimate is more than you want to pay, so it's time to get rid of the old clunker in your driveway. A 501(c)(3) public charity you like will take it off your hands. You'll dispose of your car, support a favorite charity, and get a nice income-tax deduction. It's the best of all possible worlds—isn't it?
Scenario B: Your 501(c)(3) organization accepts the donation of a used car, turns it over to a broker to sell, and receives a portion of the proceeds. Your nonprofit receives some much-needed cash, the donor gets a deduction, and the broker makes some money. It's a win-win-win situation—right?
In these two cases, yes. But vehicle donations to charity don't always work out that way. To clarify the situation, on June 29 the IRS issued two new publications on the topic, one for donors and one for charities.
Donors Beware"A Donor's Guide to Car Donations" (IRS Publication 4303) offers the following advice to individuals thinking of giving a used car to charity:
- "Check out the charity"
Only gifts to qualified nonprofits are deductible. If you plan to deduct your vehicle donation from your taxes, you need to verify that the nonprofit receiving the car is a qualified organization before you turn over the keys and title.
Note: If you find a nonprofit on GuideStar, it's likely that your gift to it will be deductible. To be sure, look at the fine print that appears under the organization's EIN on the first page of its GuideStar Report. If it is a 501(c)(3) public charity, your donation will be deductible. If the nonprofit is exempt under another subsection of the tax code—for example, a 501(c)(4) organization or 501(c)(6) entity—contact the organization to ask about the deductibility of your gift.
- "See if you'll get a tax benefit"
You can deduct charitable contributions from your taxes only if you itemize your deductions on Schedule A of your 1040. There are also limits to the total amount a donor can deduct for charitable contributions.
- "Check the value of your car"
A car's blue book value is not necessarily the same as its fair market value—a vehicle missing a bumper or driven for thousands of miles without an oil change will have a lower fair market value than a car that is the same age and model and has been well cared for. Only the fair market value of the vehicle you donate can be deducted from your taxes.
- "See what your responsibilities are as a donor to charity"
Make sure you obtain all necessary receipts and, if you declare your car's value as more than $5,000, that you have a written assessment for it.
Charities Beware"A Charity's Guide to Car Donations" (IRS Publication 4302) warns charities that an organization's car donation program can affect both the nonprofit's tax-exempt status and the donor's ability to deduct the gift. Individuals associated with the charity cannot benefit personally from the program, and only reasonable fees may be paid to a person who sells donated vehicles for the charity.
Publication 4302 identifies four types of car donation programs. Three of them should not affect a charity's exempt status or the donor's ability to deduct the value of the gift:
- The charity uses the vehicles or distributes them to the needy.
- The charity sells the vehicles and uses the profits to fund its charitable programs.
- The charity hires a for-profit agent to operate the car donation program.
In such cases, the IRS states, "The charity and the for-profit entity must establish an agency relationship that is valid under the applicable state law." The for-profit organization must be acting as the charity's agent, and the charity must have oversight over the actions the agent takes on its behalf.
- The charity allows a for-profit entity to use its name to solicit car donations, receives a fee or percentage from the sales, but has no control over the for-profit organization's activities.
Contributions to this kind of vehicle donation program are not deductible, even if the nonprofit uses the money it receives to fund charitable activities.
Because the charity has not hired the for-profit entity as its agent and has no control over how the program is carried out, the IRS regards the car donations as contributions to the for-profit organization, not the nonprofit. "A charity," the IRS warns, "cannot license its right to receive tax-deductible contributions." Both the charity and the for-profit entity can be penalized if they mislead donors about the deductibility of their contributions through this kind of program.
Suzanne E. Coffman, August 2004
© 2004, Philanthropic Research, Inc. (GuideStar)
Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.