The Tax Benefits of Charitable Contributions of Artwork

Tax News You Can Use | For Professional Advisors

One of my favorite things to do when visiting new cities is to wander through art museums. I find the beauty and peacefulness enlightening and inspiring. On these visits, I cannot help but notice that frequently there are labels or plaques indicating that specific works of art are gifts from individual or corporate donors. It makes me grateful to the collectors who donated the art for my enjoyment and for the benefit of the public, and this public benefit is the reason that gifts of art to charity can qualify for tax deductions. The tax benefits serve as an incentive to encourage charitable contributions.

How are Charitable Gifts of Artwork Different from Cash Donations?

The primary difference between charitable donations of artwork and other charitable contributions is the significance of valuation. A gift of cash or marketable securities is easy to value, and reporting the gift is as simple as listing the item, its value and the entity receiving it. On the other hand, a charitable gift of tangible property such as artwork requires valuation, and an appraisal is key to establishing a donated item’s value for purposes of claiming a tax deduction.

How Much can a Donor Claim as a Charitable Contribution for Income Tax Purposes?

The amount of a charitable deduction for income tax purposes depends on a series of factors.

• The characteristics of the donated property;
• The type of organization that receives the donation;
• The purpose for which the donated property will be used; and
• Whether the donor retains any ownership rights.

Each of these factors determines whether the donor can claim a deduction for the fair market value of the artwork or only the taxpayer’s basis in the property. These factors also determine whether the maximum deduction is limited to 20%, 30% or 50% of the donor’s adjusted gross income (AGI).¹

The first criteria is to determine whether the property qualifies as long-term capital gain property. Most artwork other than artwork donated by the artist, art held as inventory in a business or artwork owned for less than one year constitutes long-term capital gain property. Art that would generate ordinary income (rather than capital gains) upon sale by the donor is not long-term capital gain property. A donor’s deduction for a charitable contribution of long-term capital gain property is generally based on its fair market value (subject to further limitations discussed below). However, for ordinary income property, a donor may only deduct their basis in the property. If the art includes taxidermy, the creator’s deduction is limited to the lower of the basis or the fair market value.

Next, the taxpayer needs to identify the charitable recipient and determine their tax status. The rules primarily distinguish among public charities, private operating foundations and private non-operating foundations,² with a few special exceptions for fraternal organizations, veteran’s organizations and cemetery societies. Private non-operating foundations that make immediate grants of the funds they receive are treated the same as private operating foundations for this purpose. In general, more generous deductions (based on fair market value) are available for contributions to public charities and private operating foundations than for contributions to most private foundations (based on the donor’s basis in the property).

Since obtaining status as a charitable organization requires that the entity conducts charitable activities, it seems counterintuitive that the way in which the charity uses the donated property would impact the donor’s deduction. However, when a collector gives tangible personal property such as art to a charity, the IRS makes a distinction between property that the charity uses in conducting the charity’s exempt activities and other tangible personal property. How does this work? Let’s consider an example:

What are the AGI Limitations on Charitable Contributions?

In addition to limits on deductions for a particular item, there are also caps on how much a donor can claim as a charitable deduction in one year based on the donor’s AGI. If the donor’s contributions do not exceed 20% of the donor’s AGI for the year of contribution, no further analysis is necessary. For contributions equal to or in excess of 20% of the donor’s AGI, the following limitations apply:

• If a donor makes contributions of tangible personal property like artwork, which is capital gain property, to a private grant-making foundation that does not immediately pass the contributions on to a public charity or private operating foundation, they can only deduct up to 20% of their AGI. Contributions are also restricted to 20% of the donor’s AGI if the property is given “for the use of” the charity instead of directly to them.
• If a donor makes contributions of tangible personal property to a public charity or private operating foundation and elects to deduct the property’s fair market value instead of its basis, they are subject to a limit on deductions of 30% of their AGI for the year of contribution.
• The charitable deduction for all other contributions of tangible personal property to charity is limited to 50% of AGI.

To the extent that a donor’s contributions exceed the applicable limitation, the excess can be carried forward and deducted in any of the five following tax years.

What About Artists who Donate Art They Have Created to Charity?

Unfortunately, there is typically no income tax charitable deduction for a donation by an artist of their own work to charity. There is no deduction for the fair market value, but there could be a deduction limited to the artist’s basis in the property, which is the out-of-pocket cost of creating the artwork (does not include anything for artist’s labor). However, if the artist has deducted the cost of the art supplies as a business deduction for income tax purposes, they cannot also claim a charitable deduction for those same expenses.

Is There a Deduction for Gifts of Partial Interests in Art?

Although it is possible under state law to make a gift of a partial interest in property, whether that is a gift of one part of the use of the property, a gift of the use of the property for a period of time, or a gift of the right to get the property in the future, most partial interest charitable gifts are not deductible for income tax purposes. Thus, if you allow a charity to use one part of your office building rent-free, that would not be eligible for a charitable deduction. If you have a beach house and you allow a charity to auction off use of the beach house for one week, that also would not qualify for a charitable deduction. With art, a gift of the right to use the property after the grantor’s death does not qualify for a charitable deduction at the time of the gift. There are exceptions for certain types of split interest trusts. In addition, it is possible to split the gift between charitable recipients.

What Are the Documentation Requirements to Claim a Charitable Deduction for a Contribution of Art?

The following table illustrates the threshold requirements for documentation and valuation to claim a charitable deduction for the contribution of artwork or other tangible property.

For the purpose of completing IRS form 8283, a taxpayer must file for a donation of an item or group of similar items to one or more charities with a value exceeding the specified limit. Whether the donor gives five pieces of art worth $1,000 each to one charity or to five separate charities, they would need to complete part B of form 8283.

What About Charitable Deductions for Estate and Gift Tax Purposes?

Contributions of art to charity also qualify for estate and gift tax deductions based on the fair market value of the donated property. The valuations are less controversial in this context because the amount of the gift, or the amount included in the estate, is the fair market value of the art, which is also the amount of the charitable deduction. There are more significant gift and estate tax issues with gifts of art to individuals where there is not an offset to the tax imposed on the fair market value of the asset.