For those of you considering donating a car, boat, or airplane to charity, you might want to make sure that you're aware of the new rules regarding such donations. The American Jobs Creation Act of 2004 has put into place much more strict provisions for the donation of these types of items when the claimed value exceeds $500, and those rules are already in effect for 2005.
Essentially the new law provides that the amount of the contribution deduction will be based on the use of the auto/boat/airplane (hereafter referred to as "property") by the charitable organization. If the charity uses the property in a significant fashion or makes a material improvement to the property, the donor (the person making the charitable contribution) is allowed to deduct the full fair market value of the property. But if the charity sells the asset without any significant intervening use or material improvement, the amount of the deduction will be limited to the gross sales price received by the charity. In effect, the actual fair market value of the property will be meaningless.
And it gets even more complicated. The new law also imposes very strict substantiation requirements for contributions of autos/boats/planes when the claimed value exceeds $500. Under the new rules, already in effect for 2005, no deduction is allowed unless the donor receives a contemporaneous written acknowledgement from the charity. That document must include the name and taxpayer identification number of the donor and the vehicle identification number (or similar identification number) of the property. Additionally, if the charity sells the property without significant intervening use or material improvement of the property, the acknowledgement must:
- Certify that the asset was sold in an arm's-length transaction between unrelated parties;
- Certify the amount of the gross sales proceeds; and
- Include a warning that the donor's deduction is limited to the amount of the sales proceeds.
To be considered contemporaneous, the acknowledgement must be provided to the donor within 30 days of the date of the sale of the asset. In all other cases, the acknowledgement must be provided within 30 days of the contribution. Not only that, a charity can be charged a penalty if it knowingly furnishes a false or fraudulent acknowledgement or if it knowingly fails to furnish an acknowledgement that meets all of the new requirements. The penalty to the charity can be as much as $5,000. Additionally, in order for the deduction to "stand up," the donor acknowledgement must be attached to the tax return when filed. Essentially, if you have no acknowledgement, you also have no deduction. In effect, the IRS has made the charitable organization accountable and responsible for providing you with the appropriate documents.
The IRS has recently issued Notice 2005-44 explaining, modifying, and providing some exceptions to these reporting rules. And it's anticipated that the IRS will also issue new regulations that will explain all of these provisions in the future. But rest assured, this new IRS notice does not wave a magic wand and remove the substantiation requirements noted above.
Why all the new rules? Uncle Sam has been investigating the problem of overstating the value of autos/boats/planes and found that, yes, many taxpayers were inflating the value of the property that they were donating to charity. And, in many cases, the charity was a willing participant. Not only has the IRS imposed strict rules on the taxpayer but also it has made the reporting requirements for charities much more stringent. Overkill? Perhaps. But the bottom line is that if you're thinking about selling or donating that clunker sitting in your driveway, and your decision is to make the donation, you should ensure that you and your charity are aware of the new rules and follow them to the letter.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.