|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.
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.
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).
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.
Ed Okil, NIA