The Car Donation Controversy and the Right Way to Donate Your Car

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 gratefulA andA 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"