Deductions Lost

Nonprofits that rely on donations of cars and intellectual property expect to suffer severe financial setbacks because of new regulations included in the American Jobs Creation Act of 2004, which takes effect Jan. 1, 2005.

Ron Field, vice president of public policy for Volunteers of America (VOA) in Alexandria, Va., said the $10 million generated last year from the sale of donated cars is 8.7 percent of the approximately $87 million the VOA raised last year through public donations. He said the VOA, which works as a broker for other charities as well, expects to see a drop-off of between 40 percent and 50 percent in auto donations because of the new regulations.

The regulations, which originated with the Senate’s Finance Committee, after hearings in June, puts the brakes on what the committee called inflated tax deductions by those who donate their automobiles to charity, and intellectual property such as patents to charities and foundations.

“There’s a real problem with some taxpayers vastly over-estimating the value of their cars and taking

charitable deductions they haven’t earned,” wrote Sen. Charles Grassley, R-Iowa, chair of the Senate Finance Committee, in a prepared statement. “The same is true for intellectual property donations,” Grassley wrote.

The Internal Revenue Service, seeking legislative relief, complained to Congress that it was being flimflammed by unscrupulous car donors who were claiming more than the real value.

“These regulations are potentially very damaging for us,” Field said. There are more than 4,000 charities nationwide that accept car donations and each will be impacted. The larger charities will be able to survive the regulations by making cutbacks, but smaller charities might end up being put out of business, he added.

Nonprofits that accept car donations will still realize the same amount of money from the sale of each car that they would have received prior to the new regulations. When a car is

donated, the group, usually through a broker, will sell it at auction. The charity will still get the money from the sale less the auction or broker fee.

The change is in how the donor gets the tax deduction, which is where nonprofits say they will suffer. Owners of cars valued at $500 or less will still be able to deduct fair market value on their taxes.

The regulations require that a donor wait until the car is actually sold before claiming a tax deduction. After auctioning the car, the nonprofit is to supply the donor with a receipt stating how much the car sold for and that is the amount that can be claimed as a tax deduction.

Field said if potential donors cannot at least deduct fair market value for their car, “then why should they donate them, why not just sell them on their own?”

As with car donations, donors of intellectual property such, as patents, will no longer be able to deduct their estimated fair market value after Jan. 1.

At that time, the donor will be able to only deduct income the nonprofit earned from the donation.

Michael Martin, executive vice president of Virginia Tech Intellectual Properties Inc. (VTIP), in Blacksburg, Va., the nonprofit affiliate of Virginia Polytechnic Institute and State University (VPISU), said that the new regulations will negatively impact universities and foundations. “We will see fewer prospects, but I do not believe it will drop to zero.”

There will still be corporations willing to donate patents and research to VPISU and other universities and foundations, Martin said, but not as many as there have been in the past. He said that a representative of a major company recently approached VTIP to donate an exciting new technology. The company is willing to do this because it is changing direction and will no longer be pursuing the type of product the scientists are working on, Martin said. “But the company is still so excited by the product that it wants to give its scientists a chance to keep on working on it,” Martin said.

Some of these types of donations will stop, Martin said, but he added, “I expect to see some continue to come in.”