Academic journal article Review of Business

New Valuation Rules Apply to the Charitable Donations of Vehicles

Academic journal article Review of Business

New Valuation Rules Apply to the Charitable Donations of Vehicles

Article excerpt

Abstract

The rules for determining the amount of a deduction for the charitable contribution of a vehicle were recently amended by the American Jobs Creation Act of 2004. Although charitable contributions of property are generally based on fair market value, the new rules limit the amount of the deduction to the gross sales proceeds from the subsequent sale of the vehicle by the charity.

Introduction

The Internal Revenue Code (IRC) allows a deduction for charitable contributions made during the taxable year. The American Jobs Creation Act of 2004 (AJCA) made significant changes to the rules governing charitable contributions when the contributed property is a vehicle. (1) AJCA added Section 170(f)(12) to the IRC, which contains rules for determining the amount of the deduction. (2) The new section also contains reporting requirements relating to contributions of vehicles, which generally require the donor to substantiate the contribution with a contemporaneous written acknowledgment from the donee charity. In addition, AJCA added IRC Section 6720, which imposes penalties on charities for providing a fraudulent acknowledgment of a vehicle contribution. Subsequent to AJCA, the Internal Revenue Service (IRS) issued guidance which provides exceptions to the valuation rules of Section 170(f)(12).

Background

IRC Section 170 allows a deduction for charitable contributions made during the taxable year to a qualified organization. When the contribution takes the form of property, rather than cash, special rules apply. Generally, contributions of property that would normally yield long term capital gain or Section 1231 gain upon its disposition entitle donors to a deduction equal to the fair market value (FMV) of the contributed property. (3) However, when the FMV is used to value a contribution of property to a public charity such as a church, hospital, or educational organization, the maximum deduction is generally limited to 30% of an individual donor's Adjusted Gross Income for the year of the contribution.

No deduction is allowed for claimed donations of $250 or more unless it is substantiated by written documentation from a qualified donee charity indicating the cash amount or property description of donated property. In the past, the amount claimed for donated vehicles did not have to be substantiated by the donee charity. Instead, the FMV was determined by the donor who used a variety of methods, such as the vehicle's blue book value or other less reliable methods that usually inflated the contribution amount.

For property contributions of more than $500, the donor must attach Form 8283--Noncash Charitable Contributions to his tax return. The form requires specific information including the name and address of the donee charity, the date of the contribution, the donor's tax basis, the FMV of the donated property, and the method used to arrive at this value. For property contributions with a value greater than $5,000, a qualified appraisal of the donated property is generally required.

Gross Sales Proceeds Limit

Pursuant to AJCA, the deduction for donated qualified vehicles (autos, boats or airplanes) which are valued at greater than $500 is generally limited after 2004 to the amount of the gross proceeds from the subsequent sale of the vehicle by the charity. (4) This amount is often significantly less than the blue book retail value and may not be higher than the fair market value limit of Section 170(a).

Additionally, no deduction is allowed unless the contribution is substantiated by a contemporaneous written acknowledgment that meets the requirements of Section 170(f)(12)(B). An acknowledgment is contemporaneous if it is obtained within 30 days of either the contribution or the sale of the vehicle by the charity, whichever is applicable. (5) All acknowledgments of vehicle contributions must contain the following information:

* The name and taxpayer identification number of the donor;

* The vehicle identification number; and

* The date of the contribution. …

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