Why is there a slightly sleazy vibe around car donations? Could it be the tacky, misleading-sounding billboards posted around town? As one example to the left, the “Outreach Center” (see news report) is reportedly a for-profit car liquidation firm (registered as a church) that receives thousands of cars a month, sells them (often for scrap), and gives a fraction of what it earns to nonprofits.
Five years ago, the Internal Revenue Service (IRS) set forth helpful new regulations to guide car donations after Congress grew concerned about abuses of this practice. Let’s take a quick look at car donation wrongdoing and at the new regulations, with some tips on how you can donate your old car, and how to solicit and make use of a few great car donations a year.
Why regulators are watching
Right now my 1998 Honda sits in front of my house with 167,000 miles on it and about that many nicks, still running great. The dealership where I was shopping for a new car offered an insulting $100 for it. If I had donated the car in 2004, I could have deducted $3,350 (its high Blue Book) from my taxable income and, assuming a 33% tax rate, I would have paid $1,117 less in taxes. If I’d donated it through a liquidator that gave 10% to charity, a nonprofit would have probably received about $150. In short, the government gave up $1,117 in taxes, but a nonprofit only got $150, and the people who own the liquidator company probably can afford better cars than mine.
The $150 is still money that a nonprofit can put to good use, so for some nonprofits, contracting with a liquidator may be a low-effort way to obtain funds.
The questionable part of the activity is not on the nonprofit side of the transaction; it’s on the donor/taxpayer side and the liquidator side.
Because of the improbably high amounts that some donors put on their tax deduction worksheets, and the low percentage of income that liquidators give to nonprofits, the car donation business has long attracted the attention of regulators. It’s been reported that nonprofits have been receiving 7% and less of the car value.
With nearly a million (!) cars donated in the US in 2004, this came to a lot less taxes with relatively little societal benefit. The new laws, which took effect in 2005, make sense. Now donors can only deduct the actual amount the car is sold for. In the case of my Honda, probably only $1,500 if I’d donated the car through a liquidator. The nonprofit would still get $150, but I’d only be paying $500 less in taxes: still a gap but the differential is significantly less.
New laws favor donations to nonprofits that will use the car
But! Congress did understand that many donated cars go to nonprofits such as the transitional housing group where Eric Haynes works (see Test Driving a Car Donation Campaign) that give the vehicles to low-income clients or use them in their own work. Thankfully they allowed donors in these instances to deduct the Blue Book amount, which should encourage donors to donate more cars to real, community nonprofits.
The problem? Hardly anyone seems to know about this crucial difference! Car owners (maybe even like you) don’t realize the real, important value that community nonprofits extract from donated cars, so they may end up just calling one of the billboard liquidators. And nonprofits don’t realize that even one car can make a big difference, so neglect to ask for them.
If, for example, I donate my Honda to a music center, they could use it for transporting sound equipment for off-site performances and classes. I would get the Blue Book deduction (much higher than the trade-in value!), and they would get a great car (albeit not a great looking car) for which they would have had to pay a good deal more. Instead of asking staff to use their own cars, they could use the Honda to get to meetings, pick up supplies, and so forth.
If you’re a nonprofit: Ask for a car!
- Read Eric’s article, “Test Driving a Car Donation Campaign” in this issue of Blue Avocado. As he points out, authentic car donation programs include those in which nonprofits sell cars they receive and use 100% of the earnings for their work, and others involve use of the donated cars.
- Put out the word to your members, volunteers and others that your nonprofit would be a gratefulÂ andÂ worthwhile recipient for their cars.
- Let them know that you aren’t a liquidator; you’ll be giving the car to a family, or using it to pick up art supplies. They’ll get a higher tax deduction than if they gave it to a liquidator, and probably more than if they’d sold the car and given the money to you. Only if the car is valued for more than $5,000 does an independent estimate have to be procured.
- Check out the IRS publication, “A Charity’s Guide to Vehicle Donations“
And if you have a car to donate…
- Find a local, community nonprofit that will give the car to clients or use it in their own work. Call first to make sure the nonprofit wants your car. Be honest when you describe it on the phone.
- Drive the car to the nonprofit. Help them avoid the additional expenses of going to get it. (If it doesn’t run, chances are they won’t want it.)
- Formally transfer the car to the nonprofit to ensure that you won’t be responsible for any accidents or parking tickets after the transfer. Get a receipt.
- Follow the instructions for valuing the car on your tax return.
- Check out the IRS publication, “A Donor’s Guide to Vehicle Donations“
And as for my 1998 Honda? Well, it’s still running so well I think I’ll keep it awhile longer.
Jeff Carbine says
I found it interesting when you said the vehicle donation industry has long caught the attention of authorities because of the absurdly large sums that some donors write on their tax deduction forms and the low proportion of money that liquidators contribute to NGOs. I used to think differently about it not until you explained it briefly and it really got my attention. What you said about car donation was really interesting to me.
That’s easy, come on. I’ve just googled and found this mob mentality in lord of the flies essay.
Mia Evans says
Thanks for pointing out that it would be best to find a local community non-profit organization to donate your car. I will follow your advice now that my first car is in my garage for a year now, and no one will be using it anymore. So I should donate it so that I can help others and also declutter my garage.
Adam Golightly says
Thanks for your tips about how to give a car to a liquidator because they can get a higher tax deduction and be honest when describing things on the phone. My dad has been thinking about selling his car because he won’t need it because he is getting a new one from his company that he will be able to keep. He really wants to give it away to a charity that he believes in and would be able to help a lot of people with it.
Wonderful and very inspiring post. For more information, please go to http://carsdonate.blogspot.com/
You can donate car to any of several hundred respected charities at Cars4Charities. They will even let you donate your car that needs major work or doesn’t run. They pickup car donations nationwide for free, sell them for a reasonable amount and send the proceeds to the charity you select. When you donate a car, you’ll get a tax deduction for at least $500 and support a worthy cause. For more information, please go to http://www.cars4charities.org/
I still don’t quite understand how this works. I see companies paying a ton of money to a advertise and get people to donate their cars. Are these companies the liquidators? So they get someone to donate their car to the for profit company, the for profit company keeps 90% of the sale price, 10% goes to the charity, and the donator can deduct the sale price from his income?
This whole thing still seems very convoluted to me.
A nonprofit I work with was offered a car as a donation a couple years back. I did some research, and came up with a company that would do the conversion for us: they’d pick up the car from the donor, sell it, convert it to cash, and give us a donation.
What I found out later was the content of the fine print: the company was, in effect, creating business for itself: the fees for both the picking up and the processing were figured into the transaction as costs; given that it was an older car, we didn’t see a dime from that one.
I’m curious if other readers have had better experiences with converting used cars into cash for the organization?
Legal Services for Prisoners with Children
There can be real headaches to giving cars to clients. We used to do it at an organization that I worked for, and often the cars would break down on the road and the donors would just walk away from them and they would be impounded. Also, when they would need repair they would come back to us. Although we were a social service agency, we found it easier to sell the cars and take the proceeds. It was easier in the end and did not take manpower.
That is actually how I got started in the vehicle donation business. I realized that nonprofits needed a resource for their donated vehicles. It grew out of my experience as a Development Director. Having been on both sides, I can see the benefit to having a middle man (vehicle processing center) handle vehicle donations. Even now, I deal with donors who swear their cars or motorhomes are good and they break down before we get them to the yard. But, other times, we have these wonderful cars that I would be happy to let my teenager drive. It was just to hard to tell the difference sometimes. As far as the tax law is concerned, don’t get me started.
Sure there were abuses, but the law they passed is very unfair to the taxpayer now. If a 1990 Honda were sold in Walla Walla, Washington, it may only bring in $200, if it sold in San Diego or New Mexico, border towns, that same car might bring in $800-$1000. Why should the donor get penalized for where they live? Or for poor attendance at an auction? The law needs to be amended so that donors can take a fair market value based on Kelly Blue book, not based on what the charity can sell it for. We are working on trying to get this modified.
Center for Car Donations
Maybe I missed it, but I don’t see anywhere in these articles about car donations about the insurance aspect of these transactions if you don’t use a liquidator or other third party. Once the nonprofit takes title to the vehicle, they need to make sure they have liability insurance on that vehicle. The nonprofit that has title to the vehicle is going to be held responsible for any accidents in which that vehicle is involved, including "test drives". Accepting donated autos is not like accepting a piece of art. In the wrong hands, particularly if there are maintenance issues with the cars, they can turn into lethal weapons. So, this is just one more consideration that should be given to this process.
Nonprofits Insurance Alliance Group