Title: Donating art for tax purposes
Article: As we approach tax time the search for deductions is an onerous task especially with the Internal Revenue Service and state taxing authorities always decreasing, eliminating, or making the understanding of deductions unfathomable even to Certified Public Accountants. One area seemingly applicable only to the very wealthy is donations of art to acceptable Internal Revenue Service receivers, such as museums. The concept of making money through art via a taxable donation to an acceptable receiver of the work is a valuable tool to ward off high tax payments and is available to anyone who collects art.
Art, unlike other products which depreciate through time, such as autos, computers, clothes, and furniture, appreciates in value depending upon the demand for a certain artist, and his works. Donating such works may be used to offset taxes due on income. Art donations, however, like any deduction to reduce taxable income should be assessed multifactorially. In point, there are many factors surrounding the donation such as
The relationship between taxable income and your taxes-is your tax bite high enough so that the donation will realize a benefit or decrease in the tax monies due?
The value of the donation- how was the value determined?
The fact that such donations will be examined by the IRS and its art division- are you comfortable enough to substantiate the value under an audit?
Who carried it out the valuation? Was the item appraised by a certified or licensed appraiser?
The degree of expertness of the appraiser- was the appraiser an expert from experience, college degree, or professional seal?
If an art connoisseur or gallery owner provided the appraisal did the process follow acceptable due diligence standards and typical authentication procedures dictated by IRS code and case law?
Does the potential donation account for blockage, and or have effects on other similar works in the collection?
Does the receiving agency have any issues with the Internal Revenue which will impact the value of the donation?
Will there be higher taxes due from another agency as a result of the donation? Will the reduction in Federal taxes result in a substantial increase in state or municipal taxes?
When considering art donations as a tax reduction mechanism some advise that you should hire an accountant. As far as looking to an tax expert I would first secure one of the many tax programs available to develop possible scenarios for the donation. Some software packages allow the user to interactively deal with income, gains, and deductions in a “what if” approach. Although the prevailing thinking focuses on high capital gains tax rates for the appreciated art one should also look at the tax rate tables. It is not always the case that the high rates apply. Depending on how income was earned one might find the surprise that based on the income earned for the year, the rate might be substantially less.
Most importantly, donating art should be a carefully planned event. If you earned a billion dollars for a given tax year and you are planning to sell your appreciated work at the end of the year and it is December, your planning options are weak. Instead of selling the work in December, sell it next year whereby you now have 12 months to plan for the sale rather than a few days. Failure to plan may have costly financial consequences. At the end of the year there is little room to change your income or develop various deductions. Failing to plan might mean the difference between paying the Internal Revenue Service and having the Internal Revenue Service pay you.