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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 often hear ads on radio and TV touting top-dollar deductions for donating a used car or other vehicle to charity. But it’s not always as simple as it sounds.

Strategy: Specify that the charity must use your vehicle in furtherance of its tax-exempt purpose. As a result, you can deduct an amount equal to the vehicle’s fair market value (FMV), subject to all the usual limits and restrictions on deductions for charitable donations.

Conversely, if you make no specific provisions and the charity simply sells the vehicle and collects the proceeds, your deduction is generally limited to the sale price collected by the charity. That may be much less than FMV.  

Here’s the whole story: Under current rules, if the vehicle’s value exceeds $500 and the charitable organization sells it, your deduction is limited to the amount received in the sale. (For a car valued at $500 or less, the deduction is equal to the lesser of $500 or the FMV.)

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 an IRS-approved charitable organization that is qualified to receive deductible contributions.
  • In the best-case scenario, the deduction is strictly limited to 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.
  • The donation and the FMV must be properly documented. The recordkeeping 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 all 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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