Anyone donating a car to a charity has only days left to sign over the title before tax-law changes could reduce the value of the deduction for write-off purposes. Congress changed the law in October so that starting January 1, 2005, donors must deduct what the car actually sells for, which is usually much less than the Blue Book value donors have used in the past. Because of the change, some ministries are preparing for up to a 30 percent drop in donations.
Willow Creek Community Church's CARS ministry provides cars to people who don't have transportation. (The acronym stands for Christian Auto Repairmen Serving.) One of the ministry's selling points in its brochure is that a vehicle's "Blue Book value defines a fair tax write-off." The program's director, Joel Krooswyk, says many donations have come from people who don't want to spend the time and money selling their car and instead have claimed a tax write-off worth far more than what the car would sell for in the classifieds.
The new law requires nonprofits to provide car donors with a receipt showing how much their car actually sold for, if the value is more than $500. If the car required any repairs, the cost of repairs must be deducted from the sales value. Donors must use that figure, not the Blue Book estimate, on their tax return.
Krooswyk, along with other nonprofits, lobbied Congress to stop passage of the bill. "It's not the end of the world," he said, but he expects a 30 percent decline in income. The surpluses the CARS ministry formerly had will disappear, Krooswyk says. "We'll be a baseline organization again."
But it's hard to know what exactly to expect. Barry Kurland, general manager of Habitat for Humanity's Cars for Homes program says they have no estimates on the new law's potential impact. "There are people who are clearly committed to contributing to Habitat's mission," says Kurland. "We expect those people to continue to contribute." Despite the change, Cars for Homes, which began as a pilot program, is now expanding throughout the West.
The Salvation Army expects a 25 percent drop in income at some of its busiest regional programs. Other regions, however, do not expect much of a decline, says Salvation Army spokesman Major George Hood. "The highest risk is that there will be fewer cars donated because the tax incentives have been minimized, and to receive the car there will be a tremendous level of paperwork," he said. This latter factor may have the broadest impact, he says. "Paperwork is going to be enormous for any nonprofit that accepts used cars."
The new IRS rules require organizations to provide receipts for donors within 30 days of the sale. That means keeping a database of cars, donors, and sales, which in turn raises overhead costs. "It could mean our postage expense doubles," says Krooswyk. "That would hurt."
After the change, Krooswyk expects regular donations of junk cars to continue . The ministry receives about 20 cars per week worth less than $500. Usually, Krooswyk can sell them for scrap for $125 each, and the weekly income of $2,500 or so is still a boon. Likewise, he doubts gifts of expensive cars will drop much. Often, he says, those donors need several deductions to put them in a lower tax bracket. CARS sells both expensive and junk cars to fund the ministry of repairing and giving mid-range cars to single mothers and others who need them.
But it's the middle-value cars that Krooswyk worries about. He says someone with a five-year-old minivan may have 100,000 miles on it and a bad transmission. The market value may be $3,000, but minus repairs, could only net a $1,800 deduction. Instead of donating, Krooswyk expects those people to fix the car and keep driving it or sell it themselves.
Donors whose cars are used, instead of sold, are allowed to take the Blue Book value. Because Wycliffe Bible Translators gives all of its cars to missionaries on furlough in the United States, they expect an increase in donations as donors choose to drop their car off with Wycliffe where they are guaranteed the Blue Book value. Fred West, director of Wycliffe's program, says while many aspects of the change are still being worked out, he expects better-quality cars. "I think it will help us."
In response, CARS and Habitat are working on getting the best value they can when selling donated cars. "We are working with a partner that has an extensive network of recyclers, salvage auctions, as well as running auctions that we'll be able to sell our cars through, and as a result be able to maximize the value of the donation for any given car," says Habitat's Kurland. CARS has begun selling cars on eBay to see if the auction site will earn them more money.
Meanwhile, ministries are trying to focus on the purpose of the donation rather than the tax break. "We're focusing our message around the importance of the donation, in terms of serving Habitat's mission," says Kurland. Some nonprofits are telling potential donors to donate now, says Krooswyk. That's not the right approach, he says. "People donate because they believe in what we do."
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IRS rules regulating itemized donations are available on this IRS FAQ page.
The Salvation Army has more information about its car donation program.
Wycliffe Bible Translators has more information about its car donation program.