Charity’s Guide to Vehicle Donation
Every 501(c)(3) not-for profit organization has to raise funds in order to continue its charitable work. Charities can solicit cash donations, hold food drives, run a second hand store or do any of a hundred other things in order to acquire money. One option that many people have paid close attention to is that some charities will accept car and vehicle donations, allowing the donor to write off a hefty sum on his or her taxes for that year. Of course there are certain rules that a charity has to follow and qualifications that the organization has to meet in order to offer such a car donation program. Guidelines for donors rather than charities can be found in IRS publication 4303.
1. Tax Exemption for Charities Running Vehicle Donation Programs
A charity has to be fully dedicated to a purpose listed in 501(c)(3) in order for it and its funds to be tax exempt. If a charity chooses to run a vehicle donation program then it has to be sure that everything, from the donation to the sale to where the funds go afterward fits within that sphere of charity. If the vehicle donation program gives an unfair or uncharitable benefit to a given individual then that could put the charity’s tax exempt status at risk. If a charity loses that status it will have to file Form 1120 if it’s a corporation or Form 1041 if it’s a trust when it comes time to pay taxes.
1.1 What to do When Operating a Charity Vehicle Donation
In order to avoid any conflict of interest, a charity needs to make sure that everything that’s done with a donated vehicle or the proceeds from selling a donated vehicle has to be in the interest of the organization’s purpose. So in order to keep things on the level you can:
- Use proceeds of sales to fund your charity efforts
- Use the vehicle to further the needs of your charity
- Improve and repair the vehicle before sale to increase price
- Give the vehicle to someone at a vastly discounted price as part of a charitable act.
1.2 Guidelines For When The Charity Works With a Private, For-Profit Agent
While most charities know how to use funds to further their causes, they may not know how to go about selling donated vehicles. In order to help raise funds these charities might hire for-profit organizations to act as contract employees whose job it is to take care of the sales aspect of the car donation program. When you do this you have to be very careful that everything stays above board so that you don’t endanger your tax exempt status. You need to have a contract that lists out the details of your relationship with the for-profit organization, that gives you as the charity final say in accepting or denying sales and contracts, and which gives you oversight of all dealings of your agent. You also need to lay out exactly how much money the agent gets from sales, and how much goes to you as the organization. This is important not just for you, but for the people whose cars are being sold, as the cut you receive as the charity is the highest amount those donors can claim, according to document 4303.
1.3 Allowing a For-Profit Seller to Use Your Name for a Fee or Cut of Profits
This might sound fishy, but this is actually a solid business plan that won’t imperil your not-for-profit’s tax exempt status if you go about it the right way. You, as the charity, give a for-profit business that’s accepting car donations the right to use your name, and for every donation the company gives you a fixed amount or a cut of the value of the car’s sale. The for-profit company cannot say that the donations are tax deductible, because they’re not, and you don’t have any control over the program or the actions of the other company. You’re just letting them use your name, saying something like, “For every car donation received $1,000 goes to the Salvation Army.” The public has to be informed they aren’t donating straight to your charity, and they cannot be told that donations will be taken off their taxes, because they won’t. You have to make these things clear in order for this to be done legally.
2 Written Acknowledgment, or Giving Donors a Receipt
The two main reasons that people donate their cars to charity is to help out a good cause and to claim a tax deduction for the donation. However, a person cannot claim a tax deduction that’s over $250 without a written recipt that confirms the donation happened. As such you, as the charity, are responsible for providing a written acknowledgment for the car someone gave you.
2.1 Written Acknowledgments for Vehicles Worth More Than $500
If someone donates a vehicle worth more than $500, which is pretty likely since we’re talking about cars, boats and planes, you need to fill out certain paperwork as the charity. Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes is the necessary form that you’ll need, and it has to have specific information listed on it:
- Donor’s name and taxpayer ID
- Vehicle identification number
- The date of the contribution
- A statement that no goods or services were provided, or if goods and services were provided for the donation then list them, even if they are of a non-material, religious nature.
2.1.1 When Charity Sells the Vehicle
If you, as the charity, sells a vehicle that was donated for more than $500 you will also need to include some other information with the written acknowledgment:
-Provide a statement that the vehicle was sold at an arm’s length transaction between unrelated parties
-List the date the vehicle was sold
-List the gross proceeds from the sale and make a statement that the donor may not deduct more than this amount
If a donor fails to provide his or her proper taxpayer ID number then, regardless of how much you sold the vehicle for, follow the rules on acknowledgment for cars sold for under $500, located below.
2.1.2 If the Charity Plans on Using the Vehicle Rather Than Selling It
Sometimes your charity might have a need for a pick up truck beyond the value it would bring at sale. So if you intend on using a vehicle regularly and for an extended period (say you were going to use that truck to haul goods between stores for a year before sale), then you will have to provide different information on the donation:
-A statement that the charity intends to make a “significant intervening use” of the vehicle
-The details of what you intend to use the vehicle for
-How long you intend to use the vehicle for
-Certification that the vehicle won’t be sold before the term of use you listed has passed.
2.1.3 Your Charity Intend to Make a “Material Improvement” Before Sale
A material improvement is a major repair or addition that will increase the vehicle’s sales worth. Giving the dirty van a washing off and vacuuming out the inside isn’t enough, though it will certainly make the vehicle a little more palatable. This doesn’t include painting, waxing, dent or scratch removal, installation of theft deterrent devices or any upgrade that was paid for by the donor. If you’re going to install a material improvement on the car then you need to provide:
- A statement about the improvement you intend to make, and the details of what the improvement is
- Certification that the vehicle won’t be sold until the material improvement is finished
2.1.4 Giving or Selling the Vehicle to a Needy Person at a Discounted Rate
If you’re a charity whose goal is to relieve the suffering of the poor then you might choose to give a donated vehicle to a poor person or family who could better their lot with transportation. You could also choose to sell the vehicle to a needy person at a price that is far below the fair market value, but in either case you’ll need to provide this additional information:
-Statement that you intend to sell at a low price or give the vehicle away to a needy person
-Show that the sale or gift falls squarely beneath the umbrella of your charity’s goals
2.1.5 When and How to Give Acknowledgment to the Donor
Depending on what you intend to do with a donated vehicle you will have to give written acknowledgment to the donor at different times. For instance, if you’re giving the vehicle away at a lower than fair market value price or if you’re going to use the vehicle before selling it, then you have to give a written acknowledgment to the donor within 30 days of you actually receiving the car as a donation. On the other hand if you’re going to sell the vehicle at a fair price or you’re going to put it up for auction, then you don’t have to provide an acknowledgment until 30 days after the vehicle is actually sold. You have to use form 1098-C as mentioned above, or provide your own statement giving all of the necessary information.
2.1.6 When and How to Give Acknowledgment to the IRS
Form 1098-C has to be filled out and sent to the IRS by February 28th of the year after the donor is given notification. Or if you’re filing your forms electronically you could send forms in by March 31 of the following year.
It’s important that you keep all of your paperwork in order and turn it in on time because, if you don’t, there are penalties that your charity will be hit with. For instance if you knowingly give a donor wrong or made up information for a donation that was more than $500 then your charity will have to pay the price stated multiplied by the highest tax rate (35 percent) or the amount of the gross proceeds of the sale, whichever one is higher. If the penalty is for a vehicle that wasn’t sold for gross proceeds then the cost will be the highest tax rate times the claimed value of the vehicle or $5,000, whichever one is larger.
So what does that look like? Let’s say that your charity received a donation for a sedan, and because it was old and the market was bad you sold it for $400. However you told the donor that the sale was for $1,000, so that’s what the donor claimed on his tax deduction. Your charity will have to pay $400 because that was the price of the actual sale, and it’s larger than the $350 (35% times 1,000) that would have been the tax paid on the amount you told the donor.
2.2 Receipts for Vehicle Donations That are Less Than $500
If you receive a donation that’s over the $250 mark, but it’s under $500 there is a separate set of steps you have to take when you write up the acknowledgment (the receipt, it’s the same thing). You have to provide:
-A description of the vehicle (not a price value, things like make, model, door numbers, color, etc.)
-A statement that no goods or services were provided for the donation, or if they were the type of services and the estimated value of them, or a statement that all goods and services were of a religious, intangible nature
2.3 When and How to Provide Your Written Acknowledgment to the Donor
When you have these much smaller donations you have to get that receipt to the donor much more quickly than you would for the larger ticket donations over $500. Fill out form 1098-C and get it to the donor either before the day that the donor files federal income tax or for the year of the contribution or the due date of the return, whichever one is earlier. Make sure that the donor knows she can’t claim more than $500 for the deduction, and send a copy of the 1098-C form to the IRS as confirmation. It is also all right to send the IRS a copy of an email sent to the donor explaining all of the information about the vehicle donation deduction.
3 Filing and Disclosure for Your Not For Profit Organization
When you receive vehicle donations you have to keep your paperwork neat, cross all your T’s and dot all your I’s. And the first step to that is knowing which forms you have to fill out, where they have to be sent and by what time.
3.1 Form 990 Series and the E-Postcard
Just because your charity is tax exempt, that doesn’t mean you don’t have to fill out forms for the IRS. Charities will fill out at least one form in the 990 series, which includes the 990, 990 E-Z and the 990-PF forms, which give the IRS information about your charity’s activities, finances, revenue and essentially give them a quick look at your books. Smaller charities will fill out an E-postcard, or form 990-N. To find out which form you need check IRS publication 557, Tax Exemption Status for Your Organization available at the organization’s website IRS.gov.
3.2 Form 1098-C
When you receive a vehicle donation that’s worth more than $500, your charity has to fill out Copy A of Form 1098-C to keep the IRS in the loop about your acquisition. Form 1098-C is due by February 28, or March 31 for electronic submissions, of the year after you gave acknowledgment to the donor. However it’s important to remember that just because you fill out Form 1098-C that doesn’t mean you don’t have to fill out 8282, listed below, which give the IRS more information about the vehicle donation you received and all of the details of the transaction.
If the vehicle donation is for less than $500 then you only have to send 1098-C Copy C to the donor. Make sure that you check the box informing the donor that he or she can’t claim more than $500 for the donation, and don’t send Copy A to the IRS for this donation.
3.3 Forms 8283 and 8282
Form 8283 is Noncash Charitable Contributions. Donors have to fill this form out if non-cash charitable contributions for the year is more than $500. If on the other hand your contributions are over $5,000 then the donor has to fill out Section B on form 8283, and an authorized official from your charity has to fill out a portion of the form and provide a signature.
If your charity has to sign form 8283, then you as the charity have to fill out form 8282, Donee Information Return if your charity sells or otherwise gets rid of the vehicle within 3 years. Form 8283 has to be filled out within 125 days of you getting rid of the vehicle, and it has to identify the donor, the charity and the amount that the charity received from the donation when the vehicle was finally sold. Once you have it filled out the charity has to give the donor a copy of Form 8282.
3.4 Quid Pro Quo Arrangements and The Statements Your Charity Needs to Make
If your charity provides goods or services to a donor that gave you a non-cash donation worth more than $75 then you as the charity have to provide the donor with a written statement of those services. More information about this process can be found in IRS Publication 1771, Charitable Contributions- Substantiation and Disclosure Requirements.
4 Requirements of State Law
In order to cover all your bases, make sure that you follow all the rules and regulations regarding state law and the transfer of liability. Donors should fill out a donation form for the Department of Motor Vehicles, and you as the charity needs to be sure that the title is fully transferred to you before you take ownership of the vehicle. The donor needs to take the license plates, and you as the charity will need to get new ones if you intend on using the vehicle.
5 Getting Help From State Officials and the IRS
When you’re a charity you can never get too much help. Fortunately, while you have a lot of red tape to cut through and even more hoops to leap through as far as tax forms go, there are organizations and individuals that are keeping an eye out for you and your charity. All you need to do is find out how to get hold of them in your state, and how to locate them in the bureaucracy of the IRS.
5.1 Assistance From the State
Charities can never get too much help. If you’re starting up a vehicle donation program then, depending on your state, you may have to register with state organizations. For guidance on what you need to do in your state contact your state charity official, a complete list of which can be found at www.nasconet.org.
5.2 Assistance from the IRS
Contrary to public opinion, the IRS wants to help everyone get their forms filled out properly and it wants everything to run as smoothly as possible. To that end if you’re a charity and you need help all you need to do is show up and ask for it, as far as the IRS is concerned. You can get assistance at their website, IRS.gov, which has all of the forms and publications you can read to get more information on your own. You can also e-mail individuals that work with charities so that you can get answers to your questions. IRS.gov also has phone numbers and addresses for those that would rather talk to a real person or who would prefer to make an appointment to come into a regional office for help. Whichever option you feel is best for you and your charity, they’re all available.