Separating Fact From Fiction in Vehicle Donation Programs
By Caryn M. Feldman, CPA, MST

As a taxpayer, you are entitled to a charitable contribution deduction for the fair market value of a vehicle you donate to a charitable organization. The television and radio commercials for vehicle donation programs seem to run all the time. Many taxpayers overstate the value of their used cars and trucks in order to get as large a deduction as possible. Misleading advertising also contributes to the problem. They amplify people’s expectations by promising donors high values for their used cars and trucks.

Vehicle donations can lead to big write-offs to taxpayers. The number of vehicle donations continues to increase each year. Americans have grown from two car families to three and sometime four vehicles per single-family household.

Despite the bad press, there are many legitimate vehicle donation programs and taxpayers should definitely consider donating old cars and trucks. However, the last thing you want to see is your gift turned upside down and disallowed by the IRS. This can be avoided by understanding the pitfalls that may arise throughout the vehicle donation process.

The vehicle donation program consists of four phases:

1. Solicitation/donor contact – Vehicle donations are often solicited directly by the charities themselves, third party agents, or both. When you contact a vehicle donation program, you may not be speaking directly with the charity, but rather an agent working on their behalf. It is important to know with whom you are speaking.

During the initial contact, you will be asked questions regarding the condition of the vehicle. This is where you can easily be misled. Sometimes, the charity or agent will promise a deduction for the maximum “blue book” value for the vehicle. However, the IRS will only allow a deduction for the fair market value of the vehicle and condition of the vehicle is just one component of calculating fair market value.

You also need to consider mileage and the potential market for your car or truck. The value of a particular car or truck may vary significantly between a metropolitan area versus a rural area.

Often times, taxpayers desire to donate vehicles to charity that no longer run and expect to receive the full “blue book” deduction. As an act of goodwill, many charities will accept these vehicles. However, vehicles that do not run are not worth the full value listed in the “blue book” pricing guide.

2. Pickup – Donated vehicles are typically towed by charities or third-party agents. The charity takes title to the vehicle and will often times give the donor state-required forms to release the donor from liability.

3. Vehicle Sale – It may surprise you to learn that most charities do not keep the donated vehicles or repair them, if necessary, and sell them. In fact, the donated vehicles are usually sold, as is, at auction. And the sales price is often times much less than the “blue book” value or the taxpayer’s deduction.

4. Distribution of Proceeds – If the charity doesn’t use an agent to sell the donated vehicle, it keeps 100 percent of the sales proceeds. However, this is becoming increasingly more the exception than the norm. If an agent is employed, the charity pays the agent a percentage of the sales proceeds.

Vehicle donations are still an excellent way to maximize your charitable goals while minimizing your tax liability. However, it is important to understand how these programs work and the potential pitfalls you may encounter. Be sure to confirm that the organization soliciting donation is an approved tax-exempt charity or authorized agent of the charity. Some other questions you should ask are whether or not the charity will use or sell the vehicle; whether or not an agent will be involved in the transaction and if so, how much of the sales proceeds will the agent keep?

Consider the value of the vehicle very carefully. In doing so, be sure to factor in to your calculation the condition of the vehicle, mileage, marketability and comparable sales. Also, document your calculation and keep it for your records. Remember, vehicles valued above $5,000 require that an independent appraisal be obtained and attached to your return in the year of donation.

Caryn M. Feldman, CPA, MST is a tax manager at Walter & Shuffain, P.C. located in Norwood, MA, a public accounting firm providing tax, audit and business consulting services to individuals and closely-held businesses.