Important industry facts that you must consider before handing over the keys to that vehicle. Get the most from a tax write-off for that car you want to donate to charity.
For over two decades, making a vehicle donation to a charity has been a popular option for getting rid of old or unwanted cars.
Many car donation charities across the country have come to depend on the funds raised through vehicle donations. As a result numerous vehicle donation processing companies have sprung up in the automotive landscape, offering many options for charities and donors alike. Unfortunately, some of these companies have become complacent in how they process your donated vehicle, culminating in low sales numbers and minimizing write-off potential.
Vehicle Donations. A Quick Glance Back
In the early 2000s, vehicle donation programs rested on a solid foundation and nothing seemed to threaten them. Then signs of economic instability triggered government concern and eventually led to the government taking action.
Ultimately the Senate Finance Committee, spearheaded by its chairman Iowa Senator Grassley, called for an investigation by the US General Accounting Office (GAO), which uncovered a multitude of car donation abuses.
Part of the investigation focused on the tax year 2000. It showed that vehicle donations accounted for around 6% of all non-cash contributions over $500 reported on returns. The Committee findings estimated that vehicle donation deductions lowered income tax liability for taxpayers by $654 million in that year alone.
The GAO study tracked a judgmental sample of 54 donated vehicles in 2000 and compared the amount of proceeds the charities received from vehicle sales with the amount claimed as deductions on donor’s tax returns.
The results surprised everyone. It turned out that from the sample of 54 donated vehicles, the charities only received 5% or less of the actual value the donor had claimed as a deduction on tax returns.
Two factors contributing to this difference were identified.
- Donated vehicles were often sold at wholesale prices, rather than at the price the donor might expect if selling the vehicle to a private party.
- Vehicle processing and fund-raising costs were subtracted from gross vehicle sales revenue, further reducing the proceeds that charities receive from vehicle sales.
The GAO was unable to determine whether individuals claiming deductions for donated vehicles accurately assessed the fair market value of their vehicles, because data on the vehicle condition was unavailable. The report mentioned, however, that several charities the GAO interviewed had stated that some of their donors’ claims about vehicle value might have been inflated.
The 43-page-long GAO report and recommendations were very detailed and led to what was eventually approved by the Congress and included in the American Jobs Creation Act of 2004. The final version of the changed law took effect for tax year 2005.
Overview of the Charity Car Donation Tax Law
Before (tax year 2004 and older)
Vehicle Donation Under $5,000
A taxpayer could claim fair market value for any vehicle donated to charity up to $5,000, accompanied by a receipt from the charity, regardless of what the charity sold it for. No reporting requirement on behalf of the charity was required to submit IRS form 8282 once the vehicle was sold.
Vehicle Donation Over $5,000
Anything over $5,000 required a receipt from the charity, along with IRS tax form 8283 and a third-party appraisal. The charity was required to submit IRS form 8282 once the vehicle was sold.
After (tax year 2005 to present)
A taxpayer can now claim up to $500 for any vehicle donated to charity, accompanied by a receipt from the charity, regardless of what the charity sells it for.
A taxpayer can claim whatever amount the donated vehicle sells for by the charity, accompanied by IRS form 1098C completed by the charity, indicating the amount sold and other pertinent information from the donor. If sold for more than $5,000, IRS form 8283 will be required as well.
A taxpayer can claim fair market value (usually determined by an evaluation guide such as kBB.com) if the charity materially improves the vehicle or uses the vehicle significantly, and accompanied by IRS form 1098C. If determined value is more than $5,000, IRS form 8283, along with a third-party appraisal, will be required as well. Charity will be required to submit IRS form 8282 once the vehicle is sold.
A quick recap of the current vehicle donation tax law
- A taxpayer donates junk vehicle and gets $500 write-off.
- If taxpayer donates vehicle that charity sells for more than $500, donor gets to claim the sales price.
- If taxpayer donates vehicle and charity agrees to fix it or uses it, donor gets to claim fair market value.
Why is this important?
The abuses identified by the government investigation revealed several issues, but they were determined to be a loophole, and lack of government resources to police it that would change the way the vehicle donation process would continue.
The changes put the responsibility of determining how much the donor could claim on the shoulders of the charity or vehicle donation processing company.
This is where the problem lies.
It has been over six years since the vehicle donation tax laws have changed, and in that time we have seen many vehicle donation companies come and go. The one thing we haven’t seen much of, however, is how the existing vehicle donation processing companies or charities have changed to accommodate this new tax law. Most seem to work in that old mindset, selling the vehicles they receive as quickly as possible. Their primary goal is to get your car donation; not maximize your deduction.
To them it’s a numbers game. The more cars received, the more money in fees they collect, selling most through wholesale auto auctions or wholesale outlets. To prove this point: just recently one of the larger vehicle donation companies with hundreds of charities on board was bought out by a nationwide auto auction company that specializes in wholesale.
With the responsibility to maximize the donor’s write-off falling on the vehicle donation company or the charity, selling donated cars in a wholesale environment is a careless business practice, where the donor is the one who loses. We have recently heard about many car donors who had donated vehicles to other organizations and were dissatisfied with the result, because the company processing their car donations sold them at a much lower price than they were worth.
At the Prostate Cancer Awareness Project, we get it!
Our staff has many years of experience in this field, starting as far back as the late 90s. Since every donated vehicle is different, it is crucial to know which advertising medium will yield the highest selling price and maximize the write-off potential of our donors. Retail classifieds such as Craig’s List, Ebay, and Auto Trader, are where we typically advertise your donated car, truck, van, RV, or boat. If we use an auction to sell your donated property, we will thoroughly investigate vehicle values and make sure bid prices are in line with real world retail prices before accepting the highest bid. This insures the highest value possible for the write-off potential of our donors.
The primary goal of most of our competition is to get you to hand over your vehicle to them only to move it as quickly as possible in a WHOLESALE environment. We, on the other hand, spend a great deal of time making repairs, professionally detailing your donated vehicle, and then researching the best RETAIL venue, showcasing it with detailed photos, and making every effort to maximize your donation tax deduction.
So, don’t be tricked by other companies’ claims about receiving the highest value for your donation. If they are not selling your donated vehicle in a retail environment, they don’t have your best interests in mind.
In many cases we will invest our own funds to improve the quality of your vehicle, ultimately maximizing your write-off potential.
PROSTATE CANCER AWARENESS PROJECT SELLS OUR DONATED VEHICLES IN A RETAIL ENVIRONMENT!