As I’ve mentioned previously, one of the most indispensable programs I have used for probably the last 20 years has been Tax Tools from CFS Software in California. I have also been buying their Small Business Tools program for as long as it’s been offered. A few years back, I bought their Financial Planning Tools program; but I didn’t renew it after two years because it was their most expensive program and the only parts of it that I used were already included in the Tax Tools and Small Business programs. 

I had noticed their Tax Corresponder program, but had never seen a need to buy it because I was under the impression that it only covered letters to IRS and FTB, and I already have my own decades old files with the letters I have written to them.  When I was preparing my renewal order for the 2005 programs, I noticed that the Corresponder program also includes a lot of letters to be sent to clients on a huge variety of topics.  I figured if it saved me time on just one explanatory letter to a client, it would have more than covered its $39 cost.  After receiving the 2005 CD last week, and scrolling through the list of 319 master letters it contained, I noticed several right off the bat that would come in very handy around here, including an excellent CYA letter to send to the clients that we are letting go.

Short story long, as I was setting up one such letter this morning, I again noticed two letters for advising clients on the proper procedures for documenting the donations of vehicles to charities.  One is for donations prior to the new 2005 change, and the other is for the new rules.  Since I had just covered this topic in a posting last night, I though it would be interesting to show how CFS explains the differences.

For Donations Prior to 2005:

Donating a vehicle to charity has real tax advantages if you itemize your deductions, but you need to follow a few simple rules to take the deduction.  How much you may deduct depends on whether you used the vehicle in a trade or business.  If you did use the car in your business, the allowable deduction is the fair market value reduced by the amount that would be ordinary income if the car had been sold (this is generally the adjusted basis of the vehicle).  If you used the vehicle for personal use only and you owned it for more than one year, the amount of the charitable deduction is the fair market value of the vehicle at the time of the donation.

If the value is $5,000 or more, the IRS requires an appraisal of the vehicle.  If the value is less than $5,000, to determine the value, start with the used car ads or a price guide such as Kelly Blue Book.  You should then adjust the value according to the vehicle’s condition.  If the vehicle’s condition is excellent, you may be able to deduct more than book value.  A beat-up car is worth less.  Take pictures of the vehicle for substantiation of your deduction.

I have one word of caution for donations of $250 or more.  A written receipt from the charity is required, and this receipt must be in your hands by the time you file your tax return (including extensions).  The receipt must include the organization’s name, date, location of the donation, a description of the vehicle, and the value of the vehicle.  If the value of the vehicle was greater than $500, you must also provide the IRS with information as to how the vehicle was acquired (e.g. purchase or gift), the date it was acquired, and what you paid for the vehicle.

As you can see, you may be able to take a sizeable deduction.  Because of current scrutiny by the IRS of this particular deduction and the potential abuse by taxpayers, it is imperative that you follow the rules to avoid an audit.  I hope this explanation is helpful and that you will feel free to call me if you have any questions.

For Donations After 2004:

Even though the law changed for the donations of vehicles valued at more than $500 as of January 1, 2005, if you itemize your deductions, donating a vehicle to a charity will benefit you.  How much you may deduct depends on the use of the vehicle by the charity. 

I have a word of caution for donations valued at $500 or more: you must follow the new IRS rules.  A written receipt from the charity is required, and this receipt must be in your hands within 30 days of the charity's sale of your vehicle or 30 days of your contribution.  The charity's written receipt must include your name and tax identification number and the vehicle identification number.  If the charity sells the vehicle without significantly using it or materially improving it, your deduction is limited to the gross proceeds of the sale.  The charity is required to certify in writing to you whether your vehicle was sold or if they intend to sell it (limiting your deduction to the gross sales price) or whether the charity intends to use the vehicle and will not transfer it in exchange for money, other property, or services. 

As you can see, you may be able to take a deduction if you follow the new rules.  Because of current scrutiny by the IRS of this particular deduction, it is imperative that you follow the rules to avoid an audit.  I hope this explanation is helpful and that you will feel free to call me if you have any questions.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2005 10:10:00 AM Send this post: