Contributions of Cars, Boats, and Airplanes Received by Churches

We are in the third of our series of articles dealing with how churches handle contributions. Our first article gave general rules for contributions as they relate to churches. Our second article dealt with non-cash donations. Our third article dealt with contributions of stock and IRA distributions.

This current article will focus on how churches, donors, and the IRS handle contributions of cars, boats, and airplanes given to churches.

Qualified Vehicles:

The IRS has developed guidelines regarding the donation of qualified vehicles to charities which includes churches. The IRS has defined a qualified vehicle as :

• A car, or any motor vehicle manufactured mainly for use on public streets, roads, and highways,
• A boat, or
• An airplane

It should be noted that a car donated by a person who owns a car dealership would not be considered a qualified vehicle, but rather a donation of inventory.

Mechanics:

In most cases, the donor will transfer title of the vehicle to the church. Each state has different requirements regarding vehicle registration and title transfer. Please contact your local Department of Motor Vehicles to ensure that is being handled correctly. The donor will also provide the church with a claimed value of the vehicle. Once the church has the vehicle, they must determine if they are going to sell it, keep it, or give it to a needy person. The value of the vehicle also determines what type of reporting the church must provide.

Reporting Requirements of the Church:

Basically, the reporting requirement for the church depends if the donor valued the vehicle at $500 or less or at more than $500.

If the vehicle is valued by the donor at $500 or less, the church has two options on how to report the contribution. The two options available are:

• Provide a contribution receipt to the donor that lists the description of the vehicle, but not the value. Please refer to (PLEASE INSERT ARTICLE ONE HERE) for details on the contribution receipt for non-cash donations.
• Provide the donor with IRS Form 1098-C with Box 7 checked. In this instance where the value is determined to be $500 or less, the form should not be filed with the IRS.

If the vehicle is valued by the donor at more than $500, the church must file IRS Form 1098-C. Please see IRS Form 1098-C "Contributions of Motor Vehicles, Boats, and Airplanes" and Instructions for Form 1098-C for more details.

In order for the donor to claim an income tax deduction for the vehicle, the church must furnish copy B of Form 1098-C to the donor no later than 30 days after the:

• Date of sale if the car was sold at an auction by the church. or
• Date of the contribution if the church is going to keep the vehicle for use by the church or if they are going to give it to a needy individual.

Penalties That Could be Imposed on the Church:

The church could face penalties imposed by the IRS if they fail to furnish IRS Form 1098-C to the donor, if they furnish a false or fraudulent acknowledgment or if they fail to furnish the acknowledgment in the manner and time required. These penalties all relate to the timely and accurate completion of Form 1098-C.

This benefit works a little differently in that it does not result in an income tax deduction but results in an exclusion from gross income. To understand this better, lets take a closer look at it.

Individuals under the age of 70 ½ by the end of the year and who have taxable income are eligible to open a Traditional IRA. A Traditional IRA may be tax deductible or non tax deductible on the individual’s tax return depending on a number of different factors. See IRS Publication 590 "Individual Retirement Arrangements" for more information. When the person reaches age 70 ½, they must start taking money out of the account. The amount they have to take out each year is prescribed by the the IRS and is called the required minimum distribution. This distribution is taxable income to the individual and is included on their tax return. (Notice how the traditional IRA differs from the ROTH IRA. The traditional IRA receives tax deductions when the money is contributed to the fund but is taxed when the money is taken out. The ROTH IRA has no tax breaks when the money is contributed to the fund, but is not taxed when the money is taken out).

The current tax law due to expire 12/31/2011, states that individuals age 70 ½ or older may distribute up to $100,000 per tax year directly from their Traditional IRA account to a church without having to include the distribution in their gross income. This results in the payment of less income tax. The distribution to the church can also satisfy the required minimum distribution limits. In order to claim this tax benefit, the individual must obtain the proper contribution receipt from the church, even though the individual is not taking an income tax deduction. Generally, the church will receive a check from the administrator of the IRA. The church should record this money received on the individual’s contribution statement with a description of IRA proceeds included. If the church received shares in the IRA, then the contribution statement should be handled the same as the receipt of stock.

As always, please consult your CPA because you may have tax situations that are unique. Additionally, IRS rules are subject to change.

Follow us in our continuing series of articles that deal with contributions. The next one will deal with the receipt of automobiles, boats, and other vehicles by churches.