Prior to this  change, eligible taxpayers could claim up to the fair market value of the  donated vehicle as a deduction on their tax returns. For any vehicles  donated to a charity on January 1, 2005, or later with a claimed value that  exceeds $500, taxpayers can only claim the lesser of the vehicle’s fair  market value or gross proceeds of the sale as a deduction on their tax  returns unless the charity’s intended use of the donated vehicle meets one  of the three exceptions to the gross proceeds of the sale rule. Table 1 summarizes the  amount donors could deduct for charitable contributions of vehicles  before and after the changes in the rules for such deductions. Some Selected Charities Reported Substantial Declines in Number of Vehicles Donated and Had Varied Experiences with the Quality of Vehicles Donated

For the 10 charities covered in our in-depth interviews, 6 reported  decreases from 2003 to 2006 in the number of vehicles donated, 3 reported  increases and 1 did not provide data, as shown in table 2; however, the  latter reported that the number of donated vehicles is about the same  since the rule change. Three  of the 10 charities reported an increase in quality, 3 charities reported a  decrease in quality, and 4 charities reported no change in the quality of  vehicles donated. Some Selected Charities Reported Decreases in Vehicle Donation Revenue

Officials we interviewed from 6 of the 10 charities reported a decrease in  vehicle donation revenue from 2003 to 2006, 3 reported an increase, and 1  did not provide data but reported that the rule changes had no effect on  vehicle donations or revenue. We did not find a consistent pattern when  comparing the number of vehicles donated with the revenue from the  vehicle donation program or the charity’s overall revenue. Some of the Selected Charities Changed Their Vehicle Donation Business Operations in Order to Adapt to the New Environment

In order to offset decreased revenue from the vehicle donation programs,  some charities have changed their vehicle donation business operations. Examples of changes include using minimum bids, selling vehicles online,  and selling vehicles directly to the public. Selected Charities Reported Mixed Experiences with Administering the Changes in Vehicle Donation Rules

All of the charities said that administrative burdens have increased;  however, some charity officials noted that they were able to accommodate  the increase. Appendix III: Objectives, Scope, and Methodology

Our objective was to determine how charities have been affected by the  2005 changes to the amounts donors can claim on their tax returns for  donated vehicles. The information provided by charity officials is  anecdotal and cannot be generalized to other charities that operate vehicle  donation programs. Donors are asking more questions since the change in the rules than  they did before. Total charity revenues increased because of changes in other  fund-raising activities.
Why GAO Did This Study

In 2003, GAO found that many taxpayers' estimates of the value of their vehicles, claimed as tax deductions, were in excess of the charities' subsequent sales of the vehicles. Subsequently, effective January 1, 2005, the rules related to the amount taxpayers can claim as a deduction on their tax returns for vehicles donated to charities changed. Under the new rules, in many cases the amount taxpayers are allowed to claim as a deduction is less than they could have claimed before the changes. Some charities that used vehicle donations as a revenue source said that the changes could lead to fewer donated vehicles and reduced revenues. GAO was asked to determine how charities have been affected by the 2005 changes. GAO discussed the rule changes with Internal Revenue Service (IRS) officials and the impact of the changes with representatives of several charities. GAO judgmentally selected 10 charities from among the 65 contacted in the course of the 2003 GAO study. The experiences of these charities cannot be generalized to all charities because the selected charities were not drawn from a statistical sample of all charities with vehicle donation programs.

What GAO Found

The selected charities GAO contacted reported mixed experiences after the rules for claiming a tax deduction for donating a vehicle were changed. Prior to the law change, taxpayers could claim estimated fair market value for any donated vehicle. However, beginning January 1, 2005, taxpayers are generally limited to deducting only the sales price of the vehicle when a donated vehicle is sold by the charity. The 10 charities GAO contacted reported varied experiences in the number of, quality of, and revenue from donated vehicles; some changes in their business operations; and mixed experiences with administering the changes in the rules. Of these 10 charities, when comparing 2003 to 2006, 6 reported decreases in the number of vehicles donated and some of these decreases were substantial. Also, 3 charities reported an increase, and 1 did not provide data. Three reported an increase in quality, 3 a decrease, and 4 no change. Six reported a decrease in vehicle donation revenue from 2003 to 2006, 3 an increase, and 1 did not provide data. GAO did not find a consistent pattern when comparing the number of donated vehicles with the revenue from the vehicle donation program or a charity's overall revenue. In response to the rule changes, some charities changed their fund-raising activities and some decreased services, such as reducing the hours for providing services. Examples of business operations changes include using minimum bids at auctions, selling vehicles online, and selling vehicles directly to the public instead of through wholesalers. Finally, all 10 reported increased administrative burden due to increased reporting requirements, but they were able to accommodate the increase in paperwork.