If you’re an art collector, you may be curious about the tax breaks that come with donating a work of art to charity. You should be aware that many different tax rules come into play when making these kinds of contributions.
Basic rules
A deduction for a donation of art can be reduced if the charity you donated to uses the art for a purpose or function that’s unrelated to the reason for its qualification as a tax-exempt organization. The reduction will be equal to the amount of capital gain you would have received if you sold the property instead of donating it.
Example: You bought a sculpture six years ago for $10,000, and it’s now worth $20,000. You contribute it to a charitable foundation. Your deduction is limited to $10,000 because the foundation’s use of the sculpture is unrelated to its charitable function, and you would have had a $10,000 long-term capital gain if you had sold it.
But what if you donated the sculpture to an art museum? In this instance, your deduction would be $20,000.
Substantiation requirements
There are substantiation rules that apply when you donate a work of art to charity. First, if you claim a deduction of less than $250, you’re required to obtain and keep a receipt from the charity, and you must keep records for any item you contributed.
If you claim a deduction of at least $250, but not more than $500, you’re required to obtain an acknowledgment of your contribution from the group you donated it to. The acknowledgment must state whether the organization gave you any goods or services in exchange for your donation and include a description with a good-faith estimate of the value.
If you claim a deduction of more than $500, but less than $5,000, you’ll need to maintain records that include information about how and when you obtained the artwork and its cost basis in addition to getting an acknowledgment. You are also required to complete an IRS form and attach it to your tax return.
If the claimed value of the property you donated is more than $5,000, you must have an appraisal of the property in addition to the acknowledgment. Your appraisal must be completed by a qualified appraiser no more than 60 days before the date of the contribution and meet other requirements. You must include information about these donations on the IRS form you send with your tax return.
If the total of your deduction is more than $20,000, you must attach a copy of the signed appraisal, and the IRS may require you to include a photograph. If the item has been appraised at $50,000 or more, you can request that the IRS issue a “Statement of Value,” which can be used to substantiate the value of your donation.
Percentage limitations
Additionally, your tax deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which is typically your adjusted gross income. Percentages vary depending on the year in which the contribution is made, the type of organization, and whether the deduction was required to be reduced based on the unrelated use rule described above. The amount not deductible because of a ceiling may be deductible in the next year under carryover rules.
Partial interest gifts
Sometimes donors make gifts of partial interests in artwork. For instance, a donor may contribute a 50% interest in a piece of artwork to a museum, with the agreement that the museum will exhibit it for six months of the year, and the donor will retain possession of it for the following six months. There are special requirements that apply to these donation agreements.
Make sure you get the most from your donations with Smolin
If you’re unsure of how to claim deductions for artwork you may have donated this tax year, or if you have further questions about how these deductions work, contact us for more information.