Charitable donations of artwork can give rise to substantial tax benefits, but donors need to be aware that not all donations are treated equally for tax purposes.
Many donors are not aware that the use to which the recipient organization puts the art will impact the amount of the charitable deduction the donor receives. Most donors assume that the deduction will be equal to the fair market value of the artwork at the time of the contribution (subject to certain limitations based on the donor’s adjusted gross income). This is the case, however, only if the artwork is related to the exempt purpose of the charitable organization. If it is not, then the amount of the deduction is reduced by the amount of gain that would have been long-term capital gain had the donor sold the property at its fair market value when it was contributed. In other words, the amount of the charitable deduction will be limited to the donor’s basis in the artwork (i.e. what he or she paid for it) rather than the artwork’s fair market value. For donors who have held artwork for a long period of time, this difference can be substantial.
For example, if a donor donates a valuable painting to an art museum, the deduction would generally equal the full fair market value of the painting at the time of the contribution. If, on the other hand, the donor gives a valuable piece of artwork to his or her favorite charity to care for the homeless, thinking that the charity can sell it and use the proceeds to fund its operations, the amount of the deduction would generally be limited to the donor’s basis or cost in the artwork, which could be significantly less than the current fair market value.
Other things to remember: The donor must satisfy certain reporting requirements in order to take advantage of the charitable deduction. These requirements become more stringent as the value of the claimed deduction increases. At the very least, written confirmation from the recipient organization must be obtained. The donor must also file Form 8283 if the amount of the deduction exceeds $500, and must obtain a written appraisal of the donated property from a qualified appraiser if the deduction exceeds $5000. If the contributed art is appraised at a value of $50,000 or more, the donor can request a statement of value from the IRS before filing the return that claims the deduction, and can rely upon the statement when claiming the deduction.
If you are considering a charitable donation of artwork, please contact David Ulich or Dawn Mayer of the Sheppard Mullin Tax Group to discuss the relevant considerations and requirements for claiming a charitable deduction for artwork.