Vernoia, Enterline + Brewer, CPA LLC

Posts tagged ‘vehicle deductions’

FAQ: Are donations of used vehicles still fully deductible?

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

Vehicle donations

According to the U.S. Department of Transportation (DOT), there are approximately 250 million registered passenger motor vehicles in the United States. The U.S. is the largest passenger vehicle market in the world.  Potentially, each one of these vehicles could be a charitable donation and that is why the IRS takes such a sharp look at contributions of used vehicles and claims for tax deductions. The possibility for abuse of the charitable contribution rules is large.

Bona fide charities

Before looking at the tax rules, there is an important starting point.  To claim a tax deduction, your contribution must be to a bona fide charitable organization. Only certain categories of exempt organizations are eligible to receive tax-deductible charitable contributions.

Many charitable organizations are so-called “501(c)(3)” organizations (named after the section of the Tax Code that governs charities. The IRS maintains a list of qualified Code Sec. 501(c)(3) organizations. Not all charitable organizations are Code Sec. 501(c)(3)s. Churches, synagogues, temples, and mosques, for example, are not required to file for Code Sec. 501(c)(3) status. Special rules also apply to fraternal organizations, volunteer fire departments and veterans organizations. If you have any questions about a charitable organization, please contact our office.

Tax rules

In past years, many taxpayers would value the amount of their used vehicle donation based on information in a buyer’s guide. Today, the value of your used vehicle donation depends on what the charitable organization does with the vehicle.

In many cases, the charitable organization will sell your used vehicle. If the charity sells the vehicle, your tax deduction is limited to the gross proceeds that the charity receives from the sale. The charitable organization must certify that the vehicle was sold in an arm’s length transaction between unrelated parties and identify the date the vehicle was sold by the charity and the amount of the gross proceeds.

There are exceptions to the rule that your tax deduction is limited to the gross proceeds that the charity receives from the sale of your used vehicle. You may be able to deduct the vehicle’s fair market value if the charity intends to make a significant intervening use of the vehicle, a material improvement to the vehicle, or give or sell the vehicle to a qualified needy individual. If you have any questions about what a charity intends to do with your vehicle, please contact our office.

Written acknowledgment

The charitable organization must give you a written acknowledgment of your used vehicle donation. The rules differ depending on the amount of your donation.  If you claim a deduction of more than $500 but not more than $5,000 for your vehicle donation, the written acknowledgment from the charity must:

  • Identify the charity’s name, the date and location of the donation
  • Describe the vehicle
  • Include a statement as to whether the charity provided any goods or services in return for the car other than intangible religious benefits and, if so, a description and good faith estimate of the value of the goods and services
  • Identify your name and taxpayer identification number
  • Provide the vehicle identification number

The written acknowledgement generally must be provided to you within 30 days of the sale of the vehicle.  Alternatively, the charitable organization may in certain cases, provide you a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, that contains the same information.

The written acknowledgment requirements for claiming a deduction under $500 or over $5,000 are similar to the ones described above but there are some differences. For example, if your deduction is expected to be more than $5,000 and not limited to the gross proceeds from the sale of your used vehicle, you must obtain a written appraisal of the vehicle. Our office can help guide you through the many steps of donating a vehicle valued at more than $5,000.

If you are planning to donate a used vehicle, please contact our office and we can discuss the tax rules in more detail.

IRS makes mid-year adjustment to mileage rates

For the third time in six years, the IRS has announced a mid-year increase in the business standard mileage rate to reflect higher gasoline prices. The business mileage rate increases by 4.5 cents, rising from 51 cents-per-mile to 55.5 cents-per-mile for all business miles driven during the second half of 2011. The medical/moving mileage rate also increases by 4.5 cents-per-mile for the final six months of 2011 but the charitable mileage rate, set by Congress, remains unchanged.

Mileage rates

Taxpayers that use the standard mileage rate method calculate the fixed and operating costs of their automobiles, light trucks or vans by multiplying the number of business miles traveled during the year by the business standard mileage rate. Using the standard mileage rate generally takes the place of deducting many of the operating costs of a vehicle. With certain exceptions, the standard mileage rate is generally available to all taxpayers. One important exception applies to five or more vehicles used simultaneously, as in fleet-type operations.

Rising gas prices

The IRS traditionally sets the mileage rate for the current year at the end of the preceding year.  In December 2010, the IRS announced that the business standard mileage rate would be 51 cents-per-mile for calendar year 2011 and the medical/moving standard mileage rate would be 19 cents-per-mile for 2011. The charitable mileage rate, at 14 cents-per-mile would remain unchanged for 2011.

In May 2011, a bipartisan group of lawmakers encouraged the IRS to raise the 2011 mileage rates to reflect higher gasoline prices.  The IRS previously raised the mileage rates in mid-year 2008 and in mid-year 2005 because of spikes in gasoline prices. Gasoline prices are one factor that the IRS takes into account in determining the rates.

Mid-year adjustment

“This year’s increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gasoline prices,” IRS Commissioner Douglas Shulman said in announcing the mid-year rate change.

Effective July 1, 2011, the business standard mileage rate increases from 51 cents-per-mile to 55.5 cents-per-mile for business miles driven on or after July 1, 2011 and on or before December 31, 2011.  The medical/moving standard mileage rate increases from 19 cents-per-mile to 23.5 cents-per-mile for the same period. However, the charitable standard mileage rate is unchanged at 14 cents-per-mile for the final six months of 2011.

If you have any questions about the mid-year mileage rate adjustment, how to use the standard mileage rates or the actual expense method, please contact our office.

IR-2011-69, Ann. 2011-40