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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.

 


Keith Haring

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 return.


Norman Rockwell

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.


RoyLichtenstein


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 deductions).

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 organizations).

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 cost).

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 is needed.

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 you.

Regards,

Ed Okil, NIA
Executive Director







 

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