President Bush Signs Into Law New Tax Rules on Noncash Gifts

President Bush last week signed into law a bill that will tighten rules for donations of cars, trucks, and other vehicles, as well as gifts of intellectual property and noncash corporate gifts that exceed $5,000 in value. The changes aim to prevent individuals and companies from taking overly generous deductions for such donations.

The provisions are part of the American Jobs Creation Act, a package of corporate tax breaks (HR 4520) that Congress approved this month.

Members of Congress have said the changes are needed to rein in donors who deduct too much for their old cars, as well as companies that run car-donation programs for charities, some of whom keep what Congress considers to be too large a percentage of the profits.

But many charities have expressed concern about the provisions, especially the one involving car donations (The Chronicle, July 22). The change will “virtually eliminate car donations to charities,” a coalition of charities that lobbied against the bill said in a statement.

The law limits a donor’s income-tax deduction for a donated car, truck, boat, or airplane to the amount a charity received after selling it. Charities are required to supply receipts to donors stating how much the vehicles were sold for. Donated vehicles worth less than $500 are exempt from the requirement, as are vehicles that a charity fixes up and then uses for its own purposes.

The car donation provision takes effect January 1. Until then, donors are allowed to deduct a car’s fair market value based on estimates in used-car price guides, as long as the car is valued at less than $5,000. Donors who give cars worth more than that are required to obtain appraisals.

Reducing Deductions

The law also sharply reduces the size of the tax deduction that companies and other donors may claim when they donate intellectual property such as patents to charities. Donors must deduct either the amount they spent to create the item or its fair market value, whichever is smaller. Previously, all donors could deduct the fair market value of the items, including their potential to bring in future income, whether or not the charity ever realized the income.

“Corporations have been reducing their tax bill by hundreds of millions of dollars each year by taking intellectual property of little or no value and donating it to a charity,” said Sen. Charles Grassley, Republican of Iowa, in a statement. The law “ends this abuse by corporations while still encouraging the donation of legitimate intellectual property that has real value for actual development.”

The legislation also requires companies to provide an appraisal for any gifts, including art or other collectibles, worth more than $5,000. Previously, only individuals were required to do so.

Both the intellectual-property and corporate-gift provisions apply to gifts made after June 3, 2004.

The provisions that change donation rules for noncash gifts are estimated by the Joint Committee on Taxation to produce an additional $6-billion in revenue over the next decade by reducing the charitable deductions donors of such gifts can claim.

Mixed Reactions

Many organizations are still trying to figure out how much impact the rules changes will have. At Goodwill International, where chapters run their own donation programs, some may decide to stop soliciting cars, says Christine Nyirjesy Bragale, media-relations director.

“We just found it ironic that the legislation called the Jobs Act will negatively impact the Goodwill programs, which are designed to help people find jobs,” she said.

Ron Field, vice president of public policy at Volunteers of America, which netted $10-million last year by selling 80,000 vehicles, said Congress has turned its back on charities, while providing billions of dollars in new tax breaks to wealthy corporations. “It is utterly shameful that these corporate tax cuts are being carried on the backs of charities.”

Others, however, said the effect of the changes would be minimal.

“We know our donors and their primary motivation is not the tax deduction,” said John Davis, chief executive officer of the National Kidney Foundation, which receives 75,000 donated cars a year. “We are concerned about the possibility of losing some donors of higher-end vehicles who may elect not to donate because of the new tax rules. But overall, the legislation limiting tax deductions does not affect most of our donors.”

Some charities are concerned that donors may not understand that not all donations of cars are covered by the new law.

“My fear is that there will be a mass retreat from donations and it will force us out of business,” said Martin Schwartz, executive director of Vehicles for Change, a charity in Elkridge, Md., that fixes up old cars and sells them to low-income people for $750 to $950 each. “Donors that donate cars that are used in our program can still deduct their fair market value. This is what we need to make sure the public knows.”

Only 3 percent of charities solicit donations of cars and other vehicles, said Diana Aviv, president of Independent Sector, a coalition of about 600 nonprofit groups and grant makers. If some charities give up such solicitations, the result will be increased competition for charitable dollars from other sources, she said.

But Ms. Aviv also pointed out that those groups have an opportunity now, since the car-donation provision doesn’t take effect until next year. “Nonprofits can make a pitch to the public to use this time to donate their automobile,” she said. “They may see a windfall of donated automobiles between now and December 31.”

Sharnell Bryan contributed to this article.