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Give ‘clunkers’ to charity and salvage big tax deductions

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in Small Business Tax,Small Business Tax Deduction Strategies

If you missed out on the popular cash-for-clunkers program this summer, you can still qualify for big tax benefits for an older vehicle.

Strategy: Donate your “clunker” to charity. Instead of trading in your vehicle, simply give it away to a qualified charitable organization. This entitles you to a deduction on your ’09 return.

The American Jobs Creation Act of 2004 tightened the rules for charitable donations of vehicles. However, you may be able to squeeze through one of two special tax loopholes in the law.

Here’s the whole story: Prior to 2005, generally, you could deduct the perceived fair market value (FMV) of a vehicle you donated to charity. But Congress became concerned about some overaggressive valuations for beat-up jalopies. Under the 2004 law, the charitable deduction for a vehicle valued above $500 is generally limited to the amount of the sales price when the charity sells the vehicle. The same deduction crackdown also applies to donations of boats and aircraft.

However, if (1) the charity “materially improves” the vehicle (e.g., it replaces the transmission or installs new features) or (2) it “significantly uses” the vehicle for its tax-exempt purpose and properly certifies its use, you can still deduct the full FMV.

1. Material improvements: A material improvement increases the vehicle’s value. Cleaning, performing maintenance and making minor repairs isn’t enough; neither is painting, rust proofing or waxing, removal of dents and scratches, cleaning or repairing upholstery or installing an anti-theft device.

2. Significant intervening use: This occurs only if the charity uses the vehicle in furtherance of its regular activities. A significant use includes providing transportation for a considerable period—say, one year—but it doesn’t include use to provide training in general business skills such as marketing and sales. Another example of an approved significant use is using the vehicle to deliver meals.

In cases where a taxpayer can still deduct the car’s FMV, the value may be determined through an established used-vehicle pricing guide, but only if it lists a sales price for a vehicle that is the same make, model and year; sold in the same area; in the same condition, with the same or substantially similar options and features; and with the same or substantially similar warranties and guarantees.

Tip: The IRS imposes strict documentation requirements for charitable donations. For details, see IRS Pub. 526, Charitable Contributions, at

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