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Get more tax mileage from car donation

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in Small Business Tax,Small Business Tax Deduction Strategies

You may hear the TV and radio ads that claim you can receive top-dollar deductions if you donate a used car to charity. But it’s not always as easy as it sounds.

Strategy: Specify that the charity uses your vehicle in furtherance of its tax-exempt purpose. In that way, you can deduct an amount equal to the vehicle’s fair market value (FMV).

Conversely, if you make no specific provisions and the charity sells the vehicle and collects the proceeds, your deduction is generally limited to the resale price.  

Here’s the whole story: Until a few years ago, you could deduct the full FMV of a vehicle you donated to a qualified charitable organization with no argument from the IRS. However, due to a 2004 tax law provision, the rules have changed. Under current rules, if the vehicle’s value exceeds $500 and the charitable organization sells it, your deduction is limited to the amount the vehicle is sold for.

Note: If the charity materially improves the vehicle (e.g., repairs dents or installs new features) or significantly uses the vehicle and certifies the use, you can still deduct the FMV.

In any event, be aware of these requirements when you donate a vehicle to charity:

  • The charity that received the donated car must be a charitable organization qualified to receive deductible contributions.
  • The maximum possible deduction is the vehicle’s FMV. That doesn’t mean the highest value listed in a used-car buyer’s guide for the make and model without regard to other factors such as the vehicle’s condition and mileage.
  • The donation and the FMV must be properly documented. The record-keeping requirements in this area depend on the value claimed and the total amount of your annual charitable donations.

Tip: Obtain a contemporaneous written acknowledgment for charitable gifts of $250 or more. Also, if you’re claiming a deduction for property donations above $5,000, you’ll need an independent appraisal.

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