By Hannah Tager.
In the Summer 2019, the Center for Art Law hosted its first charitable auction, during which it considered: how can artists and donors receive tax benefits for donating artworks to a non-profit organization? As it turns out, the answer is a bit lengthier than one might expect.
The Current Legal Landscape
The Tax Cuts and Jobs Act of 2017 brought about large changes to all areas of taxation, deductibles included—as a reminder, if something is tax deductible it means that its value can be subtracted from the taxpayer’s legally taxable income. Due to this broad reform, publications pertaining to tax code are now outdated if not obsolete (including this previous publication by the Center on the topic). For a recent guide on the subject of art donations as deductibles please see IRS Publication 526 (2018), Charitable Contributions, which summarizes the Internal Revenue Code Section 170: Charitable, etc., contributions and gifts. Intended as a general guide (and not as a checklist), this article focuses on these IRS publications, highlighting pertinent sections of the tax code for artists, collectors, and donors interested in giving charitable donations of artworks.
Condition 1: Artists Excluded
Professional artists—i.e. artists who can demonstrate having gained a profit from their artworks—can generally deduct the cost of materials used to create an artwork from their taxable income as a business expense rather than a charitable donation. Since the IRS considers this artwork to be a self-created asset, artists can claim materials needed to produce their original creative work, such as paints, brushes, canvases and frames, as business-related expenses on their federal tax returns (IRS Form 1040 Schedule C). It should be noted that nontraditional materials, whether they be bottle caps or barbed wire, can also be deducted, although the time and physical labor put into constructing an artwork cannot be; for a charcoal sketch that took hours to make, an artist can only deduct the charcoal and paper costs. With these provisions, artists only pay taxes on their profit, not their total revenue. However, the IRS does not allow “double-dipping,”. Therefore, if an artist has already deducted materials under Schedule C, they cannot list them again as a charitable expense for a donated artwork.
In short, an artist, if donating directly to a foundation, cannot receive a tax deduction for an artwork he or she has created. According to the Internal Revenue Code Section 170 titled “Charitable, etc., contributions and gifts”, where property is donated, the deduction must exclude the “amount of gain which would not have been long-term capital gain.” That is to say, one can only deduct a contribution that is a long-term capital gain, for example, property that has been owned for over a year and is then donated. In the case of professional artists, however, donations of their artwork constitute neither a short nor long-term gain. Instead, artwork is thought of as the professional artist’s trade, and it is thus treated as income by the IRS. The IRC thus prohibits artists from donating their own work for tax deductions.
In the case of a collector donating artwork to a nonprofit, if the artwork and the receiving organization fulfill the requirements, the work’s former owner may be able to deduct the fair market value of the artwork from their taxable income. This introduces a further condition.
Condition 2: Determining the Fair Market Value
When filing for deduction, the donor must determine the “fair market value” of the artwork. This requirement introduces a new set of guidelines and terms related to the appraisal of the piece. As per the IRS definition, the fair market value is the price that the artwork would sell for on the open market on the date of its contribution. The value must reflect the price that would be agreed upon by a willing buyer and a willing seller, with neither being required to act and both having reasonable knowledge of the relevant facts. For works valued at $5,000 or more, a written appraisal by a qualified appraiser is required. To be a qualified appraiser, one must have earned appraisal designation from a recognized organization and met education and experience requirements, i.e. is certified for the property in question or has completed college or professional-level coursework relevant to the property being valued. Also, the appraiser must work regularly and cannot have been prohibited from practicing before the IRS under section 330(c) of title 31 of the United States Code. The Official Museum Directory of the American Association of Museums has a list of qualified appraisers for reference.
Appraisers can be expensive, and generally, appraisal fees cannot be deducted. In select cases, however, appraiser fees can qualify as a miscellaneous deduction, subject to a 2% limit, on Schedule A (Form 1040) if they were paid to determine the amount allowable as a charitable contribution. The selected appraiser must write an appraisal that meets the relevant requirements of Regulations section 1.170A-13(c)(3) and Notice 2006-96, 2006-46 I.R.B. 902 and attach Form 8283, Section B, Part II to the former owner’s tax returns.
Condition 3: Related Use Requirement*
Before one can deduct the now appraised fair market value of the artwork, a collector must make sure that the donation itself fulfills some requirements. As the IRS outlines, a donor cannot deduct the artwork as a charitable contribution if the piece is a contribution to a specific individual, nor can the contribution benefit the donor directly.
The most specific requirement, and the most taxing to fulfill, is the “related use” condition. A donor of art can deduct the fair market value of the artwork from their taxable income if the donation was put to a “related use” by the nonprofit (e.g. if the art was received by an art institution and is used an educational tool, then it’s “related use”). However, if the use if “unrelated” to the nonprofit’s mission, the donor must deduct the lesser of either the fair market value or the original value of the work.
Therefore, the IRS mandates that one cannot deduct the fair market value of a piece of property if the donated work is then put to “unrelated use” and its original value is less than the fair market value.
Within the related use clause, it is also underscored that the artwork must be put to relevant use for at least one year before the receiving organization sells, trades, or otherwise disposes of the property. Likewise, for works over $5,000, the donee must retain it for three years; otherwise, the donor must recapture part of his or her charitable contribution deduction by including it in income. For the Center’s purposes, this means that the artists and collectors that donated artworks to our auction are unfortunately not eligible to receive a tax deduction for the fair market value of their pieces since the Center sold the artworks within a year of receiving them for “unrelated use” to the Center’s mission.
Condition 4: Donation to a Fully Qualified 501(c)(3) Organization
In addition to fulfilling these requirements, the donated artwork must also have been a contribution to a fully qualified organization before it can be deducted. A fully qualified organization must be a 501(c)3 as determined by the government– you can check the exempt organization database to see a charity’s 501(c)3 status. All charities that have received 501(c)3 status are non-profit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. Once the donor has ascertained that the receiving organization is a qualified non-profit, the charity must issue the donor a statement that declares that it did not exchange any goods or services for the donation.
Effect and Deduction
If the charity and donation meet all these requirements, in most cases the donor can deduct the fair market value of the property at the time of the contribution. For the most part, the deduction for charitable contributions generally cannot be more than 60% of the donor’s adjusted gross income (which is the gross income minus adjustments and deductions to that income). From there, collectors must file a Schedule A (Form 1040) with their tax forms to deduct donations. If the donor wants to deduct a non-cash donation, as is the case with art, form 8283 is also required. All filings must be done within the year the contribution was made.
By following these steps, a successful deduction can be possible, yet the strict regulations with which collectors must comply may deter these donors from giving to charities. The best approach as a collector would be to make a contract with the selected organization to guarantee that they will fulfill the conditions set by the IRS. Otherwise, count on cash donations to non-profit organizations for easy deductions and be very selective in choosing charities to which you donate your artwork. Many charities, and the ones that may need art donations the most, will not be able to meet the prerequisites for a deduction. In this case, make sure to set a budget for how many artworks you will donate and remember that donating a non-deductible piece of artwork could be a small loss for you but a massive gain for an organization.
Reminder: The Center for Art Law is a qualified 501(c)(3) which will gladly accept your donation!
- Tax Cuts and Jobs Act, Pub. L. No. 115-97, (2017) 26 U.S.C.(2017). ↑
- 26 U.S. Code § 170 (2018). ↑
- Id. ↑
- DEP’T OF THE TREASURY, INTERNAL REVENUE SERV., PUB. 526 CAT. NO 15050A, CHARITABLE CONTRIBUTIONS: FOR USE IN PREPARING 2018 RETURNS 11-12 (2019). ↑
- Id., 1. ↑
- IRC § 170.1.6
- Hannah Cole, How the New Tax Cuts and Jobs Act Impact the Art World, Hyperallergic (Sept. 24, 2018).
- IRS Publication 561 (4/2007): Determining the Value of Donated Property, April 2007.
- IRS Publication 526. Cat. No 15050A: Charitable Contributions: For use in preparing 2018 Returns, Department of the Treasury: Internal Revenue Service, IRS CC, 12.
Acknowledgments: The author would like to thank Jason Kleinman for his thoughtful advice during the preparation of this article.
About the Author: Hannah Tager was a Summer 2019 intern at the Center for Art Law and a rising Senior at Williams College in Williamstown, MA, where she also works at the Clark Art Institute and serves on the board of the town’s radio station, WCFM 91.9.
Disclaimer: This article is intended for educational purposes only and should not be construed as being a substitute for seeking legal advice.
* On September 15, 2020, this article was edited to correct the section on the “related use” requirement.