The American Jobs Creation Act of 2004 provides that the amount of a deduction for charitable donations after 2004 of qualified vehicles where the claimed value is more than $500 depends on the charity's use of the donated vehicle.Qualified vehicles include motor vehicles, boats and planes that aren't inventory or held for sale in the ordinary course of business. The Internal Revenue Service has issued Notice 2005-44 to provide detailed guidance on the charitable contribution rules that apply to qualified vehicles that are donated after 2004.
Deduction limits
The amount of deduction is limited to the charity's gross proceeds from sale, if there's no significant intervening use or material improvement, unless the donated vehicle is given or sold at a low price to needy individuals.
If a qualified vehicle is sold without any significant intervening use or material improvement, then the donor's charitable deduction cannot exceed the charity's gross proceeds from the sale.
There is significant intervening use if the donee charity actually uses the vehicle to substantially further its regularly conducted activities, and the use is significant. Such use includes providing transportation on a regular basis for a significant period of time, or significant use directly related to instruction in vehicle repair.
However, it does not include use of the vehicle to provide training in general business skills, such as marketing and sales. Examples of significant use are the use of a donated auto to deliver meals every day for a year, and driving the vehicle at least 10,000 miles in a one-year period to deliver meals, even if it's not used to deliver meals every day.
Material improvement includes a major repair or improvement that improves the vehicle's condition in a way that significantly increases its value. Cleaning, minor repairs, painting, rust-proofing, removal of dents and scratching, cleaning or repair of upholstery, waxing, and installation of anti-theft devices are not material improvements to the vehicle.
The gross proceeds limitation also does not apply if the charity gives a qualified vehicle (or sells it at a price significantly below its fair market value) to a needy individual. This exception applies only if supplying a vehicle to a needy individual is in direct furtherance of a charitable purpose of the donee charity of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
Fair market value
If the gross proceeds limitation does not apply, then the amount of the donor's charitable deduction for the contribution of a qualified vehicle cannot be more than the vehicle's fair market value.
This is basically the same rule that applied under pre-Jobs Act law, i.e., to all contributions of vehicles before 2004. The IRS said in Notice 2005-44 that the fair market value of a vehicle may be determined by using an established used-vehicle pricing guide (i.e., a Blue Book-type reference). However, such a pricing guide may be used only if it lists a sales price for a vehicle that:
(c) Is the same make, model and year;
(c) Is sold in the same area, in the same condition, with the same or substantially similar options or accessories; and,
(c) Is sold with the same or substantially similar warranties or guarantees as the donated vehicle.
Dealer retail value cannot be used to determine the fair market value of a vehicle.
Observation: If there is significant intervening use, the price for which the vehicle is eventually sold will probably be less than the price for which it could have been sold without that intervening use. If there's a material improvement to the vehicle, the price for which it is eventually sold will probably be more than the price for which it could have been sold without that improvement.
The IRS said that regulations to be issued for post-June 3, 2005, contributions will make it clear that, for charitable deduction purposes, an acceptable measure of fair market value for contributions made after June 3, 2005, and before the date that regulations become effective, is an amount that doesn't exceed the price listed in a used-vehicle pricing guide for a private-party sale of a similar vehicle.
The service also says that it will consider whether other values, such as the dealer trade-in value, are appropriate measures of fair market value, but that any regulations limiting a vehicle's fair market value to an amount less than the private-party sale value will not apply to charitable contributions made before the effective date of the regulations.
Proof required
The Jobs Act provides that a deduction for vehicles donated to a charity after 2004 where the claimed value is more than $500 will not be allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement from the donee. The acknowledgement must be obtained within 30 days of the contribution or the date the charity disposes of the vehicle, and must contain the name and taxpayer identification number of the donor and the vehicle identification number (or similar number) of the vehicle.
If the charity later sells the vehicle without performing a significant intervening use or material improvement, and it isn't given (or sold in a bargain sale) to a needy individual, the acknowledgement also must state:
(c) That the vehicle was sold in an arm's-length transaction between unrelated parties;
(c) The amount of the gross proceeds from the sale; and,
(c) That the donor's deductible amount may not be more than the gross proceeds.
Example 1: On July 1, 2005, your client contributes a qualified vehicle with a fair market value of $6,500 to a charity. On Sept. 10, 2005, the qualified vehicle is sold without any significant intervening use or material improvement. The gross proceeds from the sale are $5,000.
On or before Oct. 10, 2005, the charitable organization provides your client with an acknowledgment containing her name and TIN, the vehicle identification number, a statement that the date of the contribution was July 1, 2005, a statement that the date of the sale was Sept. 10, 2005, a certification that the qualified vehicle was sold in an arm's-length transaction between unrelated parties, a statement that the gross proceeds of the sale are $5,000, and a statement that the amount of the deduction may not exceed the amount of the gross proceeds. This acknowledgement meets the substantiation requirements and your client's deduction is limited to $5,000.
If the donee charity intends to make a significant intervening use or material improvement, the acknowledgement must include:
(c) A certification and detailed description of the intended significant intervening use and its intended duration, or the intended material improvement; and,
(c) A certification that the qualified vehicle won't be sold before completion of the use or improvement.
Example 2: On Aug. 1, 2005, your client contributes a qualified vehicle to a charity. The charity intends to use the vehicle in its charitable activities, and the intended use is a significant intervening use.
On or before Aug. 31, 2005, the charity provides an acknowledgment to your client containing his name and TIN, the vehicle identification number, a statement that the date of the contribution was Aug. 1, 2005, a certification stating that the charity intends to make a significant intervening use of the qualified vehicle and the duration of this use, a detailed description of the significant intervening use, and a certification that the qualified vehicle will not be transferred in exchange for money, other property or services before completion of the use by the charity. Since this acknowledgment meets the substantiation requirements, your client will be able to deduct the fair market value of the vehicle as determined under a used-vehicles pricing guide.
If the charity will give the qualified vehicle away (or sell it at a bargain price) to a needy individual, the acknowledgement must include a certification of this fact and that the sale (or transfer) will be in direct furtherance of the donee's charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
Example 3: On Aug. 15, 2005, your client contributes a qualified vehicle to a charity. The charity's purposes include helping needy individuals who are unemployed develop new job skills, finding job placements for these individuals and providing transportation for these individuals who need a means of transportation to jobs in areas not served by public transport. The charity determines that, in direct furtherance of its charitable purpose, it will sell the qualified vehicle at a price significantly below fair market value to a trainee who needs a means of transportation to a new workplace.
On or before Sept. 14, 2005, the charity provides your client with an acknowledgment containing her name and TIN, the vehicle identification number, a statement that the date of the contribution was Aug. 15, 2005, a certification that the charity will sell the qualified vehicle to a needy individual at a price significantly below fair market value, and a certification that the sale is in direct furtherance of the charity's charitable purpose as described above. The acknowledgment meets the substantiation requirements, and your client will be able to deduct the fair market value as determined under a used-vehicles pricing guide.
Although the above rules apply for post-2004 contributions, the IRS says that a contemporaneous written acknowledgment obtained before July 4, 2005, will be acceptable if it contains all of the required information other than the date the qualified vehicle is sold, or a detailed description of the intended significant intervening use or material improvement. For pre-Sept. 2, 2005, donations, the acknowledgement with respect to vehicles to be given (or sold at a bargain price) to needy individuals must be obtained by the donor before Oct. 2, 2005.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
