To Donate, or to Sell, That is the Question.
Dear Accounting Professor:
I have an opportunity to donate a car to a non-profit organization for $2000 donation letter or I can sell the car to them for $1000 cash. Should I donate the car or sell it to them?
I am single and work in the telecommunications industry. If all goes well for the rest of this calendar year, I anticipate that my income will place me right on the edge of the 22-24% tax brackets.
Thank you for your question. The answer you seek is not as simple as one would expect. Part of this answer is contingent on the non-profit’s intended use of the vehicle and the non-profit’s tax-deductibility status. You can check the tax-deductibility status of your non-profit via the IRS’s database at https://apps.irs.gov/app/eos/. At this site, you can see copies of the non-profit’s recently released income tax returns and determination letters from the IRS. I present the possible scenarios and my recommendations below:
The first three scenarios assume that the non-profit organization actually uses the car instead of selling your donated car:
Scenario 1: Recommendation: Sell. If your prospective donation will not result in a tax-deduction for you. Then you should sell the vehicle to that organization instead of donating it to them. Expected tax savings: $0 vs. Cash from sale: $1000.
Scenario 2: Recommendation: Sell. Assuming that donations to this non-profit do qualify as a tax-deduction for you and you will not benefit by itemizing your deductions using Schedule A on your 2021 income tax return, you should sell the car to that non-profit instead of donating it. Expected tax savings: $0 vs. Cash from sale: $1000.
Scenario 3: Recommendation: Sell. From a tax perspective, the real benefit of a tax-deductible donation to a non-profit happens when you will itemize your deductions using Schedule A. The tax brackets for single filers for the 2021 tax returns can be seen at https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021. Let’s assume that you are able to itemize your deductions instead of using the standard deduction on your IRS Form 1040. If you are just inside the 24% tax bracket by $2000 or less, then we know that the tax deduction of $2000 will yield a tax savings on your federal return somewhere between $440 ($2000 x 22%) and $480 ($2000 x 24%). Depending on your state and local income tax situation, you might even experience a tax savings on those returns from your tax-deductible donation. (The tax savings you would realize on your state and local tax returns is calculated using your income tax brackets for those returns multiplied by the $2000 donation.) Expected tax savings: at least $440 to $480 vs. Cash from sale: $1000.
The last scenario assumes that the non-profit organization sells the car to the general public instead of using it:
Scenario 4: Recommendation: Sell. If you benefit from itemizing on your federal income tax returns, your tax deduction to the non-profit will not be based on the $2000 value assigned to the car at the time of donation. Your tax deduction will be based on the value realized by the non-profit at the time of sale. This will be reported to the IRS (and you) via Form 1098-C. Two exceptions to this rule exists. The first one involves the non-profit substantially improving the car before sale, which results in a tax-deduction equal to the lesser of the fair value or your cost basis in the car. The second exception is requires the non-profit to sell the car at below market values to a needy individual or another charitable organization. You can read more about these at https://www.irs.gov/publications/p526. Expected tax savings: at least $440 vs. Cash from sale: $1000.
In each of these scenarios, you would be better off selling the car to the non-profit organization instead of donating the car. Under the current rules, the only scenario that the donation of the car would result in a tax savings that is close to (but most likely less than) the cash realized from the sale option is if you were in the highest income tax brackets for 2021 at both the federal and state/local levels.
As a point of caution, do not rush out to acquire deductions that belong on Schedule A so you can itemize. There are consequences to itemizing including wasting of resources in pursuit of a tax deduction for the sake of having a tax-deduction and the risk of any state or local income tax refund received in a year being considered taxable income on your federal return in the year you received it.