New Tax Law Affects Charities and Donors
The American Jobs Creation Act contains provisions which may affect tax exempt organizations. In particular, organizations that receive deductible charitable donations and their donors will have additional reporting burdens. The provision getting the most press relates to deductions for cars. A deduction limitation based upon sales proceeds will be effective January 1, 2005. Other provisions effective this year may affect donations of intangible property such as patents as well as increase reporting or documentation requirements for donors, donees, or both.
Motor Vehicles, Boats, and Airplanes
Commonly referred to as the "car donation" rules, these rules also apply to other motor vehicles manufactured for use on roads, boats and airplanes. New rules take effect January 1, 2005 and apply to donations valued in excess of $500. For 2004 and prior years, the law allows the donor to determine fair market value without a formal appraisal for values under $5,000. For 2005, no appraisal is required if the car is going to be sold by the donee, because the deduction is limited to gross sale proceeds. There is an exception to the gross sale proceeds limit on the deduction when the exempt organization certifies that it will either use the vehicle or make improvements to it in a significant way. Also, donations of inventory are not subject to these rules. Organizations will have 30 days after a sale to provide the donor an acknowledgement. The contents of the acknowledgement are specified in the law and include the following:
- Name and tax identification number of the donor,
- Vehicle identification number,
- Certification of sale, including that the sale was arms-length and between unrelated parties,
- Gross proceeds from the sale, and
- A statement that the deduction may not exceed the gross proceeds.
The acknowledgement will need to be attached to the donor's income tax return for the year the deduction is reflected on such return. The same information contained in the acknowledgement may be required to be submitted to the IRS after regulations are issued. If the vehicle is not going to be sold, the prescribed acknowledgement is due 30 days from the date of contribution. Regulations are to be issued to clarify various aspects of the new law.
Penalties equal to the sales price, or more, can be imposed on organizations for failure to furnish the appropriate statement to the donor within 30 days after the sale. The minimum penalty is $5,000 if the organization does not provide proper acknowledgement in each case where the vehicle is significantly (to be defined in regulations) used or improved by the charity.
This change in the law could affect donor behavior. Donors may become more concerned with whether a donated vehicle is sold or whether it is used in a charitable function. Also, donors may ask charities about their track record with regard to the percentage of the retail value that is realized when cars are disposed of immediately after they are contributed. If donors were prone to significantly overvaluing the vehicle for tax purposes, they may prefer to sell the car themselves as the value of the tax benefits may be perceived to be significantly less.
The new law will limit contributions of intellectual property contributed after June 3, 2004. This includes patents, copyrights, trademarks, trade names, trade secrets, know-how, software, similar property, or applications or registrations of such property. The initial deduction will be the lesser of the cost or fair market value of the contributed property. Then, a percentage of "qualified donee income" may produce additional deductions for up to twelve years. The percentage starts at 100% and gradually decreases to 10%. The aggregate qualified donee income must exceed the initial deduction before the additional deductions are applicable. Extensive regulation
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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