Maximizing Charitable Income Tax Deductions When Donating Art

Most Recently Updated November 5th, 2017.

From Our “Ask a Question” mailbag: How Do Go About Maximizing Charitable Income Tax Deductions When Donating Art?

Maximizing Charitable Income Tax Deductions When Donating Art.

If you are an art collector interested in giving a piece of art to a charity, what factors should you consider to maximize your income tax deduction?

The Short Answer.

Short Answer. If a person as a collector contributes highly appreciated art purchased and held over one year to a qualified public charity and reported the contribution along with a supporting appraisal (if the art exceeds $5,000.00 in value) the person will avoid recognizing the built-in capital gains. Also, avoid paying inheritance and estate taxes.  Further, the person will be able to deduct the full fair market value of the donation as of the date of the contribution.

The Longer Answer.

Long Answer. The Tax Code encourages the contribution of art to tax-exempt organizations by allowing deductions against income for the gift. The size of the deduction will depend on several factors.

Things Change Quickly.

Use this information for background, but verify everything with a tax professional before acting. The tax laws are ever-changing. Make sure you have the most current data.

The Factors.

Owner’s Status. The first step in examining the tax consequences of gifting art is to determine if the taxpayer is a collector, a dealer, the artist or an investor. Much larger deductions are available for collectors.  While the tax advantages of charitable donations by dealers, the original artist and investors are more limited.

Gains in the value of Art held for more than one year are considered long-term capital gains if the person is a collector.  While the IRS believes those same gains are ordinary income if the owner is a dealer who holds the art as part of his business inventory. A collector’s donation of artwork with built-in capital gains generates an income tax deduction valued at the artwork’s full fair market value.

The income tax deduction is limited to the person’s basis in the property if the sale of the artwork would generate ordinary income. Which is the case with an art dealer, someone who has held the art for less than one year (short-term capital gains property) or the artist herself.

So, for example, say an art dealer in Philadelphia purchased a work of art for $100,000 that was worth $500,000. Subsequently, the dealer contributed that art to the Philadelphia Museum of Art.  The dealer would only receive an income tax deduction of $100,000.

Using the same facts, an art collector making the purchase and holding the art over a year would receive a $500,000 income tax deduction.

If the original artist contributed the $500,000 work to the museum, she would only receive a deduction for the materials used in creating the work.

What is a Public Charity?

Public Charity: An organization recognized by the IRS as a public charity must receive the gift. IRS Pub. 78. lists most charities. Also, public charities are usually more than happy to provide the potential contributor with proof of their public charity status. Contributions to private charities are limited to the giver’s basis.

Related Use. To qualify for the maximum deduction, the gifted art must be something customarily retained and exhibited by the public charity.  Further, it must relate to purpose or function constituting the basis the charity’s status as a public charity.

Document Everything.

Creating the Paperwork. Generally, if the public charity wants the offered art as a gift the staff will create the necessary paperwork proving that it is a public charity and that the donated artwork satisfies the related use rule. The contributor will include the paperwork along with Form 8283 (Noncash Charitable Contributions) on the collector’s income tax.

If the value of the donated art is greater than $5,000, the taxpayer must obtain a “qualified appraisal.”  The appraisal must be obtained no more than sixty days before the donation. See IRC Section 170(f)(11)(C). This qualified appraisal must be attached to the taxpayer’s tax return, as it is the value the IRS can accept as the deduction. A “qualified appraiser must conduct a qualified appraisal.” 

Appraiser Criteria.

The appraiser must meet the criteria, found in IRC Section 170(f)(11)(E)(ii). (1) Firstly, he must have earned an appraisal designation from a recognized professional appraiser organization or have met professional education and experience standards. Also, (2) He must regularly perform appraisals and receive compensation for such assessments.  Lastly, (3) he must meet other guidelines as prescribed by the IRS (there are several). Selecting wisely is important. If the IRA rejects the appraisal, the resulting reduction of income tax deduction can easily result in additional income taxes, interest, and potential penalties.

The IRS’ Office of Art Appraisal Services reviews all appraisals.  They may or may not choose to accept the qualified appraisal value. If the Office does not accept the value, or if the appraised value exceeds $20,000, they refer the matter to the Commissioner’s Art Advisory Panel. Comprised of twenty-five art experts, the Panel evaluates the art without tax implication knowledge. 

For example, if the donator is deducting the gift as a charitable contribution on an income tax return, the taxpayer would benefit from a higher appraisal.  In contrast, if the art evaluation was for estate tax purposes, a lower value benefits the taxpayer. The IRS accepts Panel’s findings as the final value of the art for tax purposes. Statistics from 2008 show that the IRS accepted approximately 42% of qualified appraisals submitted without Panel review. And the Panel recommended adjustments of roughly 56% of the matters referred to the Panel.

Statement of Value. If the contributed art exceeds $50,000 in value the donor may request that the IRS issue a Statement of Value. The donor may rely on a Statement of Value, avoiding potential penalties.

Maximizing Charitable Income Tax Deductions When Donating Art.

Space here doesn’t allow me to give a great deal of detail. So, if you would like more information I encourage you to read more about estate planning options including more advanced ideas using Irrevocable Trusts. 

In this Post, I tried to introduce you to the ideas related to Maximizing Charitable Income Tax Deductions When Donating Art. Further, I included links to even more detailed information on my website.  So, let me know how I did, comments and questions are welcome!

Furthermore, I would be happy to answer your questions.  If you have any other matters for a Philadelphia Estate Planning Lawyer, feel free to contact our office for a free consultation. We try to make the process as painless as possible!

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