The most important thing to remember when purchasing a work of art in
the light of taxation is WRITTEN RECORDS. These records
should include a receipt or invoice from the purchaser which includes the date you made the
purchase, the name of the person or entity you bought it from as well as their address, phone
number and how much you paid for the piece. Also these should include the name of the creator of
the work, a physical description of the piece, the name, edition and number of the piece, a
certificate of authenticity and title, and any other pertinent information that is known about the
piece. You should also retain the canceled check or charge slip with which you paid for the item.
It is generally recommended to keep these documents in one file and if possible, keep it in a safe
deposit box or fire proof safe.
Policies on the taxation of proceeds
from art sales and/or donations of art can be quite complicated for even a top
accountant or financial planner unless they specialize and are experts in tax
matters related to art. This is designed as a guideline only for your tax
consultant as it related to the current rules and regulations established by the
Internal Revenue Service for federal taxes. Policies can differ from state to
state, so we strongly suggest that you contact your certified public accountant
(CPA) or tax attorney with questions on your specific art dealings since you are
eventually going to have to deal with the IRS in connections with it.
Donating Works of Art
For Tax purposes, the IRS only accepts the Fair Market
Value of an artwork as a basis from which to begin your calculations - no matter what the
circumstance of the deduction or payment may be.
According to the IRS,
Fair Market Value is general the price the art would sell for on the open market. It is the price
that would be agreed on between a willing buyer and a willing seller, with neither being required
to act, and both having a reasonable knowledge of the work being offered.
You must be able to support any deductions with
written documentation. For a piece valued at under $500.00, this may be as simple as a bill of sale
or receipt signed by the person from who you purchased the piece.
If the piece is valued at between
$500.00 to $5,000.00, you'll be required only to list the details of your gift and
whatever documentation you have on IRS from 8283 which is used when you have made a
non-cash charitable contribution. For contributions exceeding $5,000.00 in value,
your documentation must include not only this form, but also more complete
information about the donated property and an appraisal from a qualified source,
You will need statements concerning the physical condition of the artwork and the
extent of any restoration having already been done on the piece. In most of these
cases, you have to actually attach a copy of this appraisal to your
Be aware also that not all appraisers are art experts
and those who are, are not experts in all genres and medias. The IRS gives more weight to an
appraisal from an expert in the particular art form you are asking to take the deduction for as
well as their appraising track record.
In no case, may the appraiser be the one who sold you
the art, or is a dealer in that type of art. Also prohibited would be fees paid to the appraiser,
that were based on a percentage of the value of the artwork donated.
There are several things that must be taken into consideration when donating a work
of art to a charity or museum. The first is to remember the rules about Fair Market
Value. Then know that, if your total contributions for the year are 20 percent or
less of your adjusted gross income, they are fully deductible (provided they
otherwise qualify and are not subject to the limit on total itemized
If your contributions amount to more than 20 percent
of your adjusted gross income, the amount of your deduction depends on the type of property given
and the type of organization given to. Basically, you can deduct up to 30 percent of your adjusted
gross income for items donated in entirety to religious organizations; tax-exempt educational
organizations; state or local governments; charitable groups; and foundations (particularly private
ones) which distribute 100 percent of the donations they receive or pool it into a common community
fund (all of these organizations are generally referred to as section 501C3
Donations to private foundations (except those
classified as private operating foundations) are limited to 20 percent of adjusted gross income.
Private operating foundations could be single artist museum, for example. There is another phrase
you need to understand in the complex maize of requirements for charitable deductions, that is
"used in the exempt function." If the artwork is not "used in the exempt function" of the charity,
your deduction is limited to the lower of your cost or the fair market value at the time of gift.
In other words, you get no deduction for any appreciation. This special rule only applies to things
like gifts of tangible personal property such as art, not gifts of stock or securities. "Used in
the exempt function" means that the artwork must be actually used by the donee in its regular
activities and not simply sold with the proceeds reinvested. So for example, the gift of a bronze
sculpture to the Phoenix Art Museum or to the Memorial Hospital for display in their reception are
would qualify. If you are donating to a charity other then a museum, the work must also be
appropriate for the institution. In other words, you would not qualify under the "used in the
exempt function" clause if you donated a nude photograph to a preschool.
Works of art are also subject to the general IRS
requirement that any charitable donation of $250.00 or more must be substantiated. This is in
addition to the form 8283. The collector must also obtain a separate receipt from the charity in
which the gift is described, as well as any goods or serviced provided in exchange; if none were
received the receipt must say so. This receipt must
be in the collector's hands before filling their income tax return.
For the best tax advantage, donate only to qualified
charitable institutions. The institution itself should be able to give you a copy of their
exemption letter, or you can verify that they are qualified by checking IRS publication 78, which
lists all of the qualified charities in the country. Such a charity must be listed as such and have
in its articles of incorporation or mission statement a reference station its direct responsibility
to the display of art. A collector would be well advised to obtain written confirmation of the
charities "related use" plans for the proposed contribution.
The IRS feels that if you give a piece to a charity
with no intent of ever displaying it, that charity does not qualify under the "used in the exempt
function" clause. You are, of course, allowed to donate whatever you like, wherever you like - the
only thing involved here is the amount of the donation you are allowed to claim for tax purposes.
Therefore, if you give art to a non displaying charity, you are limited to deducting
only the amount you paid for the piece, not any
appreciation (nor even Fair Market Value, if that can be set at a higher rate then your
You must tell the appraiser the name of the charity
and the date of the gift. For works of art valued at $20,000.00 and over, an 8" x 10" color photo
Also be sure to check with your CPA or tax attorney
to insure that you have owned the artwork long enough for it to qualify for any donation deduction.
For the most part, you must have owned the artwork for at least a year and a day.
While appraisal fees required to determine the fair
market value of donated property are not deductible as part of your contribution, do be aware that
they may be deductible as a miscellaneous deduction among your itemized deductions.
The appraisal must be obtained no earlier then 60
days prior to the date of the donation, and no later then the deadline for filling the taxpayer's
income tax return, including extensions.
If you discover you have made a mistake in your
calculations after filing your tax return, whether in your favor or the IRS', you can always file
an amended form to correct the error. Except in the case of obvious or assumable fraud, even if you
do make an error which means you claimed too much deduction, the IRS will customarily require only
that you pay the difference. Penalties, interest and such, usually only come into play when the IRS
suspects purposeful fraud and must set about proving it.
We have completed hundreds of appraisals for IRS
donation purposes, call us with any questions you may have. We look forward to assisting
Ed Okil, NIA