Tax and fair market value

[oddist]

Just received this: (click for the link)

Americans for the Arts urges the U.S. House and Senate to enact legislation that would allow artists to take a tax deduction for the fair market value of works that they create and subsequently donate to arts organizations. (http://capwiz.com/artsusa/issues/alert/?alertid=7155976)

[ironman]

Hi, At the present time, if I buy a piece of your work for $100,000 and donate it to a museum, I can deduct that $100,000 off of my taxes.
If you (the artist) donate that same piece to the museum instead of selling it to me, you can only deduct the cost of labor and materials that you spent to create it.
Very unfair to the artists.
Hopefully, this legislation (which has been in the works for a while) will change that.
Have a nice day,
Jeff

[grommet]

Short of the bill passing, it sounds like the key then would be to work with a buddy artist of similar caliber. You buy my piece, I buy your piece for the same amount & then we donate them to institution of choice. Just a simplistic thought.

[James Kelsey]

The Problem with the Idea of trading art with a fellow artist and then donating is this: Legally, you have to claim the sculpture you're receiving as INCOME, and you get NOTHING for the one you're trading with a friend.

So, when you donate say, a sculpture valued at $10.000, it only succeeds in taking $10,000 off your INCOME... it's a push.

It think one problem with getting a large deduction for donated art is the huge loophole that will open up... what would stop a company from hiring an artist to create sculpture to donate? I could see a million dollar company paying NO TAXES by donating a "million dollars worth of sculpture that really only cost them $10,000.

Do you think this law would case cities and other entities to stop PAYING for art, instead looking for sweet donations by artists who need the deduction more than the sale?


James, Seattle

[ironman]

Hi, One thing about the tax deduction is that you had better be able to prove a track record of prices that are near the deduction that you take.
In other words, if you're average selling price is $1500, don't try taking a deduction for $10,000.
Have a nice day,
Jeff

[EJB]

Being able to deduct fair market value for donated works sure sounds like a great idea. The problem is that it opens up numerous opportunities for abuse and fraud and the ones who will suffer the most are the well intentioned, legitimate artists. I also think it is the foot in the door for the tax man to knock on your door at any time and demand 'fair market value' tax on all of your work in the studio not to mention your estate should you pass on. Have heard more than a few horror stories about artists dealing with tax authorities over various issues. Many of which center around WHEN a given work achieves its fair market value. Can works in progress be considered a higher value than the raw materials used to make it? How much record keeping would new tax laws require? Does every piece in the studio have the same value regardless of its state of completeness or its relationship to previous work? Can experimental, unshown work be taxed based your previous sales history? In my mind a given art work does not achieve its 'fair market value' until it is sold for the first time. In other words, the market itself determines its legitimate value. If you want to support a good cause, donate your art and feel good about it. If you want a tax deduction as well, sell the piece for fair market value and donate the cash.

[sculptor]

Seems like some of you are missing a very important tenent of the tax codes.

You get to deduct what you spend...even if you spent it badly.
eg: if you thought that muffler belts and flugal valves would make your work truck more efficient, and you paid $399.99 for the valves and $29.95 for the belts you can deduct the belts and valves from your taxable income.
same same for your work jeans, gloves dust masks, clay shop heat and electricity and this damned computer.....
If you spend $1,000,000.00 on a crappy pece of art and donate the junk to a charity who sell it in a silent auction and they get the real value of $29.95 you still get to deduct the $1,000,000----doesn't really matter that you're a tasteless idiot---just follow the cash--------flip side ...if you buy good art for $10,000.00 and donate it for an estimated value of $100,000.00 you get the $100,000.00 deduction but have to declare the $90,000 as a capital gain----only advantage is timing.

Now as an artist, if you spend $10,000.00 to create a work (including all deductable tools materials and other overhead) and donate it the same year you finally made enough to hike your tax bracket from 15% to 20%, you can take the deduction and drop your taxable income to the next lower bracket---again you get the advantage of timing.

Now if you donated the same $10,000.00 piece as a $100,000.00 piece, you would have to declare the $90,000.00 as income or capital gains then deduct the $100,000.00 from your $100,000.00 income

Why bother???????

Settle for deducting your real expenses from your real income--or your spouse's income if you file jointly. Keep records of every dime you spend for the art, and deduct them all.

Now if the greedy bastards in congress really want to help----they could always make the donation a tax credit instead of a deduction from taxable income.
eg: if they allowed a $10,000 tax credit for a sisterwork to one I sold for the 10K, I could go virtually tax free for the forseeable future-----what are the odds? 100,000,000 :1 ?

best advice
Forget about getting some artistic gift from the irs. "Tain't gonna happen!

If you want to lower your taxes:
remember the tax codes were written by some very high priced lobbyists to help their clients go tax free-----they have virtually built a low-tax super highway for all of us...just find an entrance near you and get on and never take an auditors word for tax law---always read the applicable case law. Or, just forget about it.

The main thing the irs does with artists is to claim that the art is a hobby and not a business and then deny the deductions. Here, intent is everything. If you intend to make a profit, and do some simple things like advertise,(good faith effort) etc..then you can claim the deductions.
clothes, gloves, shoes, dust masks, fans, lightbulbs, heat and electricity and phonehand cream, glasses, the truck, chisels, compressors, hand and stationary power tools, paper towels, rags, winches, hammers, bandaids, splints and iodine.....maybe even the whiskey..though that may be pushing the envelope.

best wishes to all
rod

[fused]

In today's NYTimes: November 22, 2005 (http://www.nytimes.com/2005/11/22/arts/design/22tax.html)

Senate Bill Lets Artists Claim Price for Gifts

Living writers, musicians, artists and scholars who donate their work to a museum or other charitable cause would earn a tax deduction based on full fair market value under a bill just passed by the Senate.

Currently such work receives only a deduction based on the cost of materials unless it is donated posthumously by the estates.

The measure was approved as an amendment to a broader $59.6 billion tax relief bill passed by the Senate early Friday. It now goes to a House-Senate conference committee. The House version of the tax relief bill does not include the arts provision, but the senators who introduced the amendment - Charles E. Schumer, Democrat of New York, and Pete V. Domenici, a New Mexico Republican - said they were hopeful that the committee would support it.

Under the bill, artists could donate their work during their lifetimes at full market value provided that it is properly appraised and handed over at least 18 months after it is created.

The provision seems likely to open the way for more acquisitions by cash-strapped museums. "It's very important for cultural institutions and libraries to be able to be the recipient of these works of art that otherwise might go into private hands," said Mimi Gaudieri, the executive director of the Association of Art Museum Directors.

"Especially for small to midsize institutions with modest acquisition funds, as a gift from the artists, it's a great opportunity to enhance their collections," Ms. Gaudieri said.

The donated work must be related to the purpose or function of the museum or charitable organization receiving the donation.

Mr. Schumer, a member of the Senate Finance Committee, said the measure would even the playing field for arts donors. "Right now, artists are better off waiting until after they die to donate their works to a charity or a museum," he said, adding that the amendment "fixes that problem and treats artists the same as anyone else who works hard and wants to donate something to charity at the fair market or appraised value."

Arts professionals described the measure as long overdue. "Artists donate to cultural nonprofits or other nonprofits, and all they get is the cost of their materials," said Tom Healy, president of the Lower Manhattan Cultural Council, which represents arts groups downtown. "If you have a painting that's worth $5,000, you may be able to deduct $20 for the canvas."

As long as the work is physically tangible, it can be contributed as a deduction, said Robert L. Lynch, president and chief executive of Americans for the Arts, an advocacy group. "A score has value just like a painting," he said.

Applying the provision may present challenges for the Internal Revenue Service, given that appraising a work of creativity is often a highly subjective process. "It's a pretty new day in tax policy," said Dean A. Zerbe, a senior tax lawyer and investigator for the Senate Finance Committee. "It has the potential for people to want to go back and expand it."

He suggested that some professionals might seek a deduction for a product like a legal brief or a medical operation. "It's something the house will have to look at closely," Mr. Zerbe said.

The bill also comes with stricter rules for the qualifications of appraisers. "The public is now going to be made aware of what a qualified appraiser is," said Fran Zeman, the former chairwoman of the personal property committee of the American Society of Appraisers. "It's important for everyone to understand the importance of using someone who is qualified."

Ms. Zeman said that noncash contributions to charitable groups are often overvalued. The Internal Revenue Service has grappled with the valuation of donations ranging from automobiles to frequent-flier miles.

Mark W. Everson, the I.R.S. commissioner, raised that issue in testimony last spring before the Senate Finance Committee. "Valuation issues are often difficult," he said. "Overvaluations may arise from taxpayer error or abuse as well as from aggressive taxpayer positions."