The tax deduction claimed by vehicle donors is often much larger than the vehicle’s value to non-profits, according to the U.S. General Accounting Office.
by Bradley Parsons
Staff Writer
When local nonprofit groups welcomed the new year, they might have waved goodbye to a substantial stream of revenue.
Nervous administrators are taking a wait-and-see attitude about a federal clampdown on tax writeoffs doled out for donated vehicles. The new law went into effect Jan. 1. It was designed to patch the two largest loopholes in many vehicle donation programs. First, the law no longer allows donors to estimate the value of their vehicles when taking the corresponding tax deduction. The law should also limit the involvement of for-profit parties in the collection and auction process.
Congress acknowledged the new law would likely result in less vehicles donated. But that was viewed as the necessary cost to curb abuses of the program.
Donations of used cars, boats or motorhomes have become increasingly popular in the last five years. The Beach Boulevard Salvation Army Adult Rehabilitation Center earned about $600,000 in 2003 by auctioning off donated cars.
But administrators fear new restrictions that went into effect Jan. 1 could curtail future donations, leaving nonprofits with a huge hole to fill in their ledger sheets.
At issue is a provision of the Foreign Sales Corporation Tax Bill that limits the income tax deductions taken by used-car donors. The deduction used to match the donor’s estimate of the car’s “fair market value.” Appraisals were only required for vehicles worth more than $5,000.
The abuses came when donors took deductions well in excess of the amount their vehicles eventually sold for.
The new bill bases the vehicle’s deductible value strictly on how much money it brings in for the charity. Donors must wait for the sale and then must provide a receipt to match the deduction.
The new rules likely mean far smaller writeoffs for vehicle donors. A study by the government’s General Accounting Office found that charities typically receive about five cents in actual revenue for every dollar claimed by donors on their tax returns.
Nonprofit administrators like like Forrest McIntyre at the Adult Rehabilitation Center fear that donations will fall off with writeoffs tied to actual sales amounts.
“Vehicle donations have been a good fundraiser for us. The Salvation Army depends entirely on our donations. We don’t get State or federal funds,” said McIntyre. “If we lost this, it would be quite a blow.”
Vehicle donations at the ARC were trending in an upward direction; McIntyre said the ARC received 83 more cars in 2003 than the year before. The money raised accounted for about 18 percent of the center’s $4.2 million budget.
The GAO found vehicle donation programs gaining popularity nationally as well. From the late 1970s, when the programs first started appearing, to 2002 the number of charities using them doubled.
But, in Congress’ eyes, the increased popularity is part of the problem. Under the old rules, every vehicle donated was likely to cost the federal treasury disproportionately compared to the value delivered to the nonprofits.
As the programs have become more popular, towing businesses and commercial lots have become intertwined in the process. The third parties can provide everything from vehicle pickup to storage, even the auction itself. The for-profit agent then splits the revenue with the
charity.
The president of one Florida charity said he welcomes the rule change.
For-profit agents have hijacked the process in many instances, said Brian Menzies, head of Florida Car Donation, leaving the charity as a bit player in a supposedly non-profit enterprise.
“The best thing about the tax law changes is it will get all the slimeballs out of the business,” said Menzies. “95 percent of the ads you hear on the radio asking you to donate a car are for-profit dealers.”
Third party agents often take the major share of the auction profits through towing, storage and auction fees, said Menzies. A typical arrangement might earn a non-profit $100 on a $1,000 sale. Meanwhile, under the old rules, the donor could take up to a $5,000 tax credit.
Florida Car Donation could actually benefit from the new law. Menzies’ charity donates cars directly to struggling families, meaning his donors can still estimate their car’s value. The new law only affects vehicles that are sold by the charity.
Menzies looks for his donations to increase from the 400 cars he took in last year. He could benefit as donors shy away from auction programs and look for the old “fair market value” write off.
The Salvation Army hopes it won’t be their donors calling Menzies. McIntyre said a substantial dropoff in donations could force the ARC to curb some of its programs, which focus on rehabilitating men with addictions.
“We’re concerned to a certain degree, but the First Coast has always been very generous with us. Hopefully, people will continue to support the Salvation Army,” said Menzies.
The Salvation Army should find out quickly the effect of the new laws. Menzies has his eye on donation numbers for March and April. Those months typically represent the high-water mark for donations, said Menzies, because that’s when people start thinking about their
taxes.
