Contributors should check the tax rules and the receiving organization before giving up the car, boat or recreational vehicle to charity.

Giving a used vehicle to a charity seems like a win-win situation for both the contributor and recipient, but both the Internal Revenue Service and the Better Business Bureau (BBB) urge caution before doing so.

The Better Business Bureau focuses on where the money goes after the donated vehicle is sold.

It says the problem starts with the large number of charities and third-party brokers now seeking the cars, boats and recreational vehicles (RV). It recommends a bit of research to determine how and where the organization operates and how much of the car’s resale money actually goes to the charity. Some organizations spend a high percentage of their donations on fundraising and operations.

The number of charities soliciting autos, boats and RVs has increased so much that the charities now compete with one another for vehicles. That situation was an invitation for third parties to enter the arena looking for profits, Better Business Bureau says.

America's Car Donation Charities Center claims to be the largest such broker. According to its website, it has "processed over a million car donations for over a thousand charities since 1992."

Car brokers help charities to compete

Some charities have welcomed the third parties because they don’t have the resources, experience or know-how to compete in the vehicle donation business. They are willing to take a smaller part of the car resale price because the broker saves them the time, trouble and expense of soliciting the vehicles. For some of the charities, it is a matter of a little return or no return at all from cars and boats.

The profit that brokers make on the transactions varies. Better Business Bureau says some brokers take a percentage of the vehicle resale price, some take a flat per-vehicle fee and some charge the charitable organization a monthly fee. Their profits are also affected by the number of charities they represent.

Some brokers advertise that they will handle all aspects of the transfer. Better Business Bureau says those brokers may be charging the transaction expenses to the charity.

Brokers come between donor and charity

While the brokers might benefit the charities, they effectively separate the donor and the charity, making it more difficult to determine how the donation will be divided and used.

Better Business Bureau recommends the donor:

• Work directly with the charity whenever possible.
• Deliver the car straight to the charity to avoid the charity being charged a towing fee.
• Be certain the vehicle title is transferred in the charity's name. Retain a copy of the transfer.

IRS focuses on tax deductions

IRS focuses its attention on the income tax benefits of the donation. It urges the donor to be certain that the receiving organization is a qualified charity under section 501c(3) of the IRS tax code. Churches, synagogues, temples, and mosques are not required to apply for the IRS qualification.

IRS limits car deductions to the fair market value of the vehicle, which may be less than the value listed in used car guides. Internal Revenue recommends keeping a picture of the car, as well as classified ads of similar cars that might help determine market value.

If the car is worth $250 or more, IRS requires a written acknowledgment from the charity. If it is worth more than $5,000 it requires a written professional appraisal.

Two IRS publications recommended

IRS recommends two of its publications to potential car donors:

• Publication 4561, Determining the Value of Donated Property
• Publication 78, Cumulative List of Organizations. The list of charities is also available online at www.irs.gov/eo.

IRS Customer Account Services has a toll-free number (877/829-5500) for questions about the charity list.