Charitable Donations
Q1: What is a "qualified vehicle"?
A1: A "qualified vehicle" is any motor vehicle manufactured primarily for use on public streets, roads, and highways; boats, or airplanes. Motorcycles are "qualified vehicles."
Q2: If the claimed value of the motor vehicle, boat, or airplane donation is $500 or less, does the institution need to provide either a "use or material improvement" acknowledgement under the new law?
A2: No (but please read the entire answer), donors are not required to provide the institution with their federal identification number, and the institution is not required to collect it nor report it to the Internal Revenue Service (IRS). Please review the notice that colleges/universities provide donors regarding federal identification numbers (see "Tennessen Warning Notice").
However, noncash donations with a value of $250 or more still require contemporaneous written acknowledgment (i.e., prior law is still in effect if the noncash donation is $250 or more).
While IRS guidance on this issue is less than crystal clear, if the donee organization sells the donated vehicle for $500 or less without significant intervening use or material improvement, then the donee organization should provide the donor with contemporaneous written acknowledgment and apparently include the date the vehicle was sold and the gross proceeds of the sale.
Q3: What is the institution supposed to do if donors fail to provide their federal identification number?
A3: The institution may still accept the motor vehicle, boat, or airplane donation. However, the institution will be unable to provide the donors with a "sell" or "use" acknowledgement that donors are now required to have in order to claim a tax deduction. The institution may be able to alleviate some donor concerns regarding personal federal identification numbers by reviewing the Tennessen Warning Notice with the donor and discussing steps that are taken to secure personal identification numbers.
Q4: If a foundation receives a motor vehicle, boat or airplane donation, but allows the college/university to USE the donated item, should the foundation or the college/university issue an acknowledgement?
A4: The IRS has not issued guidance regarding this issue. However, IRS attorneys who drafted the legislation discussed the possibility that, in certain instances, because the foundation is not the entity "using" the donated item, the foundation may be unable to issue a "use" acknowledgement. Also, because the college was not the recipient of the donation from the donor, the college may not issue an acknowledgement. It appears that the donor may not receive the necessary acknowledgement (for motor vehicles, boats, or airplanes with a claimed value over $500) needed by the taxpayer to support a charitable deduction. Hopefully, the IRS will release further guidance on this issue and recognize the important role foundations play with regard to colleges/universities. Foundations should seek tax counsel on this issue.
Q5: What is frequent and significant use?
A5: The legislative history includes a situation in which a charity "frequently used" a donated vehicle "for about a year."
In Notice 2005-44, the IRS added that use by a donee organization includes "significant use directly related to instruction in vehicle repair." "However, use by the donee organization does not include use of the qualified vehicle to provide training in general business skills, such as marketing and sales."
Please review the "Use or Improvement" link on the previous web page.
Q6: What type of acknowledgement should a college issue to a donor if a college receives an automobile donation, makes several minor improvements to the automobile, and sells the automobile?
A6: For the institution to provide an "improvement" acknowledgement, the college must make material improvements. Material improvements would include major repairs to a vehicle or other improvements to the vehicle that improve the condition of the vehicle in a manner that significantly increases the vehicle's value. Cleaning or repair of upholstery, minor repairs, routine maintenance, application of paint or other types of finishes (such as rustproofing or wax), removal of dents and scratches, and installation of theft deterrent devices are not considered a material improvements to the vehicle.
Therefore, if minor repairs are made by the college to a donated vehicle and the vehicle is sold. The college should provide the donor with a "sell" acknowledgement within 30 days of the date the vehicle is sold.
Q7: Our automotive program works with vehicles to do improvements, but then sells the vehicles. Do we provide the donor with a "use" acknowledgement within 30 days of receiving the vehicle and then a "sell" acknowledgement within 30 days of the sale of the vehicle?
A7: If your automotive program materially improves the vehicle, then only provide the "use (material improvement)" acknowledgement. The "sell" acknowledgement would not be required because the proceeds would presumably not reflect the donors donated value. Note: If your institution materially improves a vehicle versus mere use, the acknowledgement wording should reflect the material improvement (please contact Tax Services for assistance).
See Q6 above for examples of minor improvements.
If your automotive program will frequently use the automobile for approximately a year, provide a Use acknowledgement.
If your automotive program will make only minor improvements and will NOT be using the vehicle for approximately a year but rather will sell the vehicle after making minor repairs, then ONLY issue a "sell" acknowledgement within 30 days of the sale of the vehicle. The IRS reasoning here is that only minor improvements were made and the college or university did not intend to use the donated item for approximately a year, thus only a "sell" acknowledgement would be appropriate.