Be Astute When Donating Art

Non-monetary Contributions

In the United States, donated home goods such as lightly used clothing, books, and blankets account for the majority of non-cash donations. However, many taxpayers are donating higher-value goods, including as real estate and cars, in addition to artwork and collectibles, according to the Internal Revenue Service Statistics of Income Bulletin. The most recent tax year on record, 2017, saw 127,555 taxpayers report giving art and collectibles as gifts totaling $1.676 billion.

A significant part of the philanthropic giving landscape created in the United States each year is made up of donated art and collectibles, in part because donors who gift artwork can receive significant tax incentives. It might be difficult to determine how much deduction is available because it depends on several things. Even though it's not advisable for your organization to counsel contributors on taxes, it's crucial to understand the possible advantages that certain donors may experience from making such a gift.

Acquiring Donor Artwork

To ensure that the donor's expectations are being fulfilled, it might be wise to come to an agreement with them prior to the donation. It is important to discuss and, if necessary, establish in a donor agreement how the artwork is to be used, how long it will be preserved, and its worth.

Within 60 days of the contribution date, the donor must obtain an independent, qualified appraisal if they plan to claim a tax deduction of more than $5,000. The precise definition of "qualified" appraiser is found in the Treasury Regulations, but in principle, an appraiser must possess qualifications in the relevant profession in order to perform appraisals on the kind of property that is being evaluated. Since the donation exceeds $5,000 in value, the giver must fill out IRS Form 8283 after the appraisal is completed. The form must be signed by the appraiser and the donee organization, and the appraisal must be attached. There are extra restrictions for given artwork valued at $50,000 or more. The organization must file Form 8282 within 125 days of the gift's disposition if it uses it for any purpose within three years of when it was received. 

Donors who donate artwork for $5,000 or less are exempt from having to obtain a certified appraisal. For documentational purposes, it would still be advantageous to do so, but the donor may choose to determine the artwork's fair market worth using less expensive ways. In accordance with generally accepted accounting standards (GAAP), your company must hold these assets at fair market value for bookkeeping purposes. However, valuation data will also be useful if the asset is raffled off, for instance. Hire an appraiser or employ other techniques to determine the asset's value if the donor is reluctant or unable to give your organization information about its fair market value. Usually, this entails looking at the market value of recently sold comparable artwork.

Comparing Capital and Ordinary

It is important for the donor to ascertain if the item they are donating is an ordinary or capital asset because this will affect the type of deduction that is available. The majority of donated artwork will be considered a capital asset. If a property generates a long-term capital gain upon sale at fair market value, it is considered to have capital gain status. Put otherwise, the asset has been owned for more than a year. Stocks, bonds, jewelry, coins, stamp collections, vehicles, and furnishings utilized for personal use are common examples of capital assets. The largest deduction available to donors is provided by capital gain property, which is equal to the entire fair market value on the donation date.

Ordinary income property includes works of art that the donor made, received as a gift, are possessed for less than a year at the time of donation, or are kept in inventory by a dealer. Ordinary income property donations provide a more constrained deduction. Rather than deducting the item's fair value from their taxes, donors can deduct their basis in the property. The price of the supplies needed to make the artwork, such as the canvas, paint, and brushes, serves as the artist's base. Though many artists believe these laws are unfair, attempts to reform them have been attempted, but they have not yet advanced past a congressional committee. Artists will continue to deduct far less than collectors for the foreseeable future.

Utilizing artwork following acquisition

The donation's tax deduction will also depend on how the artwork is used by the donee organization once it has been received. It can be kept for display, stored, sold, or donated by your organization. According to the regulations, art that is donated as a capital gain asset must be used in a way that advances the beneficiary organization's objectives. In such a scenario, the donor's artwork will be eligible for a full deduction of its fair market value and will continue to have its capital gain property distinction. The deduction is essentially restricted to the cost basis of the property if the organization sells, gives away, or uses the artwork for any other unrelated purpose. Any capital appreciation is also deducted from the deduction. Be aware that the definition of "related use" is ambiguous and dependent on how specific facts and circumstances are interpreted. The following cases serve as the best illustrations of this:

Example 1: A priceless Monet painting that the donor acquired many years ago. The local ministry will display the painting that was presented to it. Since the receiving organization did not utilize the artwork for a related purpose, the donor's deduction is only allowed on the cost basis. Artwork presentation is not the ministry's goal.

Example 2: The painting is donated to an art museum by the same donor. The painting may or may not be on show in the museum's gallery in the near future. Since the painting will be used for a relevant purpose, the donor is entitled to a deduction equal to the full fair market value of the artwork. 

One can review the IRS's private letter rulings for help to gain insight into how they interpret the relevant use test. In one decision, the Service determined that because lithographs were being used in conjunction with an art appreciation program, their donation to a camp for youngsters with disabilities and mental health issues qualified as connected use. An additional decision demonstrates that the Service granted the connected use defense in the case of a donor who donated his collection of porcelain art pieces to a public charity that ran a retirement community. The argument was that the art display was relevant to the charity's exempt purpose since it helped to create a home for its inhabitants. 

It's obvious that the IRS would prefer that the artwork be actively utilized to serve the goals of the organization. It might not be sufficient to prove relevant use if artwork that embodies the organization's mission is only displayed. In this case, your organization should think about creating a more direct and transparent link to the exempt mission for the purposes of the connected use test, particularly if the artwork in question is eligible for capital gain property status.

Acceptance of Gifts Policy

Getting presents that are out of the ordinary can be advantageous as well as stressful. Creating a protocol for accepting unusual gifts can be a great way to ensure that these exchanges go well. A insurance like this covers a variety of nonstandard gift categories, including annuities for charity contributions, collectibles, and interests in mineral, oil, and gas. Since cash and securities have a readily defined value and are not speculative in nature, they are not regarded as nonstandard. A gift acceptance policy enables the organization to politely reject presents that are unnecessary or would not significantly advance the organization's goals. In order to give the board or management an opportunity to assess nonstandard gifts, these policies also include review provisions, which adds another level of due diligence.

In summary

For NGOs who are open to asking for and accepting contributed artwork as a component of their fundraising strategy, there are plenty of chances. The conversation that came before it should serve as a decent introduction to this subject, although it is by no means thorough.