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Are There Tax Potholes In Your Charity’s Year-End Vehicle Donation Program?

Vehicle Donations for FundraisingAs this economically challenging year comes to a close, many non-profits are looking for ways to boost their fundraising efforts in order to meet year-end goals. Some tax-exempt organizations are looking to vehicle donations as one way to supplement end-of-year fundraising.

The last several years have seen a proliferation of for-profit entities that have created programs designed to entice participation by non-profits. Working with a “for-profit” to manage a non-profit’s vehicle donation program does not necessarily affect its tax-exempt status. However, non-profits must still exercise significant oversight of any such program.

Among other rules, the IRS requires that non-profits provide a “contemporaneous written acknowledgement” for any donation valued at $250 or more (which should include almost all vehicle donations). Charities also must provide additional documentation (such as IRS Form 1098-C) for vehicles valued by a donor at more than $500. There are unique rules relating to the amount of donation, how the vehicles are sold, and who they are sold to. Done correctly, this can be a good source of fundraising revenue. Done incorrectly, a non-profit’s tax-exempt status can be challenged.

Contracting an outside company to assist in or operate the vehicle donation program complicates things. Tax and other legal issues may arise based on the type of arrangement. One arrangement is for a hired firm to act as the non-profit’s agency for car donations. The other option is where a for-profit is licensed to operate using the non-profit’s name. That is, the donor thinks she is making a donation directly to the non-profit but, in fact, is handing the car over to a for-profit operating under the non-profit’s name. In the latter situation, the for-profit sells the car and forwards a fraction of the proceeds (in some cases as little as 10%) to the non-profit in whose name it was acting.

Each option gives rise to different tax and other legal issues. Likewise, each presents different benefits and drawbacks to the non-profit. To help nonprofits understand some of these issues, the IRS publishes A Charity’s Guide to Vehicle Donations. It can be downloaded at http://www.irs.gov/pub/irs-pdf/p4302.pdf.  Regardless, if your non-profit does partake in a vehicle donation program, be sure it confers with its accountant or attorney.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Casey Summar, Partner, The Law Firm for Non-Profits, 4705 Laurel Canyon Blvd, #306, Studio City, CA 91607

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