Before your charity accepts a car donation, make sure the board understands the scope of the project. An improperly run car donation program can affect a charity’s tax-exempt status.
IRS oversight of car donation programs often focuses on what a charity does with the donated cars. For example, if a charity uses donated cars to carry out its charitable programs or distributes donated cars to individuals in need, the program will generally not negatively affect tax-exempt status. Similarly, if a charity sells the cars and uses the proceeds for its charitable programs, that should be okay.
Things get trickier when a charity grants a for-profit entity the right to use the charity’s name to solicit car donations on the charity’s behalf. The relationship must be structured so that there is an agency relationship between the charity and the for-profit so that the charity retains control over the campaign.
Structure won’t be your charity’s only concern. There are specific appraisal requirements and necessary disclosures to the IRS. There are also state law regulations concerning transferring vehicle titling.