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Kiss My Tax
Jack Matirko
Let me give you a scenario:
You are an artist who is getting the occasional group show, maybe not selling enough pieces to quit your day job, but enough that you can still call yourself an artist without people saying 'so what do you do for a living, then?' As part of some city initiative you get asked to donate a piece of your art to the library. Great, right? Extra exposure, and according to your accountant pal, you can write off the donation on your taxes. Unfortunately, the tax law makes no sense.
In that situation, as the artist donating a work directly to a non-profit, you can write-off your cost of materials. It doesn't matter what the piece is actually worth, just what it cost you to make it.
On the other hand, let's say you sell a painting. Then, after your work goes up in value a little next year, the collector gives the painting to a museum. They get to deduct the painting's fair market value from their taxes. They get a much better deal than you do.
Enter Senator Patrick Lehy's (D-VT) bill H.R. 1524 (dubbed the "Artist-Museum Partnership Act"). The bill, if it were to become law, would fix all that and allow you to deduct the fair market value of a charitable donation of your work to a non-profit organization. It sounds like something that should have been done years ago, right? I mean it's only fair that your work be worth the same amount when you own it as it is after you've sold it to someone else. Yet the bill has been getting shot down by the Ways and Means Committee for years without making it to the floor for a vote. So why hasn't it passed? I have no idea. I can speculate, but it's really not my place. Ask your Congressman. (You can find out how here: http://www.webslingerz.com/jhoffman/state/az.html )
Worse yet, even if you donate a painting that you didn't paint, but happen to donate it so a charitable organization can auction it to raise cash (as opposed to putting it on display) you still don't get a full write-off because the deduction is reduced by the amount of capital gains the donator would have made if he or she sold the painting instead. In other words, you get screwed.
I did some digging to figure out how I think it can work. The truth is I don't actually expect anyone to go through the headache just to take a few hundred bucks off your gross adjusted income. The real point of the following is to illustrate how much simpler life would be if H.R. 1524 got passed into law for a lot of artists trying to make ends meet. I can't say this will actually work, because of other stupid laws that say you could sue me if I turn out to be wrong. So to keep our lawyers happy be advised that I'm not a CPA, nor am I what you'd call a tax specialist so if you want to try and pull off a stunt like this, talk to an accountant first. Got it? Great. Here we go:
One of the great things about a lot of artists and patrons (and hell, Americans in general) is that when you get right down to it we can be amazingly materialistic, so we tend to put more value on stuff than money. Artists and patrons, who are always hanging out with other artists and patrons, can trade pieces with each other the same way comic book geeks do. And like comic book geeks, what artists need to do is justify these trades by making them "for investment purposes". Trades made for investment purposes are differed from capital gains until you sell them under Section 1031. A lot of you already do stuff like this all the time anyway, so no big deal.
After you've done that, you have to wait at least a year before you can donate a piece for a write off. So live with them, decide which ones you really like; let them be art. When you can, get them appraised, that's important for the bit that involves federal buggery.
It's important to note here that this isn't something you can do a lot of, because if you donate an undefined number of pieces that the IRS deems "too many" all of a sudden they start calling you a dealer, and then you're right back where you started (dealers donating artwork only get to deduct what they paid for the piece ... again, I don't know, ask Congress). So, yeah ... there's an undefined limit on how often you can do this.
BUT, at this point, you can, as a collector, donate one of your friend's pieces of art to any 501(c)3 for the purposes of them putting it on display, and write it off for whatever it appraised for on your taxes. Careful though, the organization you give it to has to put it on display, otherwise there's no point in doing this. As long as it's valued under five grand they can eventually sell it, but you need to donate a piece "to be used as intended" to get your deduction. If what you're donating is worth more than the $5,000.00 cap, you should put a stipulation on the donation that they promise not to sell it for at least three years so it doesn't come back to bite you in the ass because of another stupid law passed in 2006. No kidding, if you donate a pricey piece of art to a museum, and they hang it for two and half years, and then sell it ... all of a sudden you're liable again for the capital gains difference unless the museum proves they had to sell it because of a 'previously unforseen economic situation'.
See what I mean? What a pain in the ass.
"But what would this process look like under H.R. 1524?", you ask expectantly.
It would look something like this: "Make some art. Get it valued. Donate that art. Write off that donation."
Maybe there are serious flaws that have been stopping this bill from getting passed. I think they really need to hammer this out though. The current system only discourages artists from donating. In doing so, it not only effectively penalizes artists for being charitable, but keeps art away from the public. That means everyone loses.
You are an artist who is getting the occasional group show, maybe not selling enough pieces to quit your day job, but enough that you can still call yourself an artist without people saying 'so what do you do for a living, then?' As part of some city initiative you get asked to donate a piece of your art to the library. Great, right? Extra exposure, and according to your accountant pal, you can write off the donation on your taxes. Unfortunately, the tax law makes no sense.
In that situation, as the artist donating a work directly to a non-profit, you can write-off your cost of materials. It doesn't matter what the piece is actually worth, just what it cost you to make it.
On the other hand, let's say you sell a painting. Then, after your work goes up in value a little next year, the collector gives the painting to a museum. They get to deduct the painting's fair market value from their taxes. They get a much better deal than you do.
Enter Senator Patrick Lehy's (D-VT) bill H.R. 1524 (dubbed the "Artist-Museum Partnership Act"). The bill, if it were to become law, would fix all that and allow you to deduct the fair market value of a charitable donation of your work to a non-profit organization. It sounds like something that should have been done years ago, right? I mean it's only fair that your work be worth the same amount when you own it as it is after you've sold it to someone else. Yet the bill has been getting shot down by the Ways and Means Committee for years without making it to the floor for a vote. So why hasn't it passed? I have no idea. I can speculate, but it's really not my place. Ask your Congressman. (You can find out how here: http://www.webslingerz.com/jhoffman/state/az.html )
Worse yet, even if you donate a painting that you didn't paint, but happen to donate it so a charitable organization can auction it to raise cash (as opposed to putting it on display) you still don't get a full write-off because the deduction is reduced by the amount of capital gains the donator would have made if he or she sold the painting instead. In other words, you get screwed.
I did some digging to figure out how I think it can work. The truth is I don't actually expect anyone to go through the headache just to take a few hundred bucks off your gross adjusted income. The real point of the following is to illustrate how much simpler life would be if H.R. 1524 got passed into law for a lot of artists trying to make ends meet. I can't say this will actually work, because of other stupid laws that say you could sue me if I turn out to be wrong. So to keep our lawyers happy be advised that I'm not a CPA, nor am I what you'd call a tax specialist so if you want to try and pull off a stunt like this, talk to an accountant first. Got it? Great. Here we go:
One of the great things about a lot of artists and patrons (and hell, Americans in general) is that when you get right down to it we can be amazingly materialistic, so we tend to put more value on stuff than money. Artists and patrons, who are always hanging out with other artists and patrons, can trade pieces with each other the same way comic book geeks do. And like comic book geeks, what artists need to do is justify these trades by making them "for investment purposes". Trades made for investment purposes are differed from capital gains until you sell them under Section 1031. A lot of you already do stuff like this all the time anyway, so no big deal.
After you've done that, you have to wait at least a year before you can donate a piece for a write off. So live with them, decide which ones you really like; let them be art. When you can, get them appraised, that's important for the bit that involves federal buggery.
It's important to note here that this isn't something you can do a lot of, because if you donate an undefined number of pieces that the IRS deems "too many" all of a sudden they start calling you a dealer, and then you're right back where you started (dealers donating artwork only get to deduct what they paid for the piece ... again, I don't know, ask Congress). So, yeah ... there's an undefined limit on how often you can do this.
BUT, at this point, you can, as a collector, donate one of your friend's pieces of art to any 501(c)3 for the purposes of them putting it on display, and write it off for whatever it appraised for on your taxes. Careful though, the organization you give it to has to put it on display, otherwise there's no point in doing this. As long as it's valued under five grand they can eventually sell it, but you need to donate a piece "to be used as intended" to get your deduction. If what you're donating is worth more than the $5,000.00 cap, you should put a stipulation on the donation that they promise not to sell it for at least three years so it doesn't come back to bite you in the ass because of another stupid law passed in 2006. No kidding, if you donate a pricey piece of art to a museum, and they hang it for two and half years, and then sell it ... all of a sudden you're liable again for the capital gains difference unless the museum proves they had to sell it because of a 'previously unforseen economic situation'.
See what I mean? What a pain in the ass.
"But what would this process look like under H.R. 1524?", you ask expectantly.
It would look something like this: "Make some art. Get it valued. Donate that art. Write off that donation."
Maybe there are serious flaws that have been stopping this bill from getting passed. I think they really need to hammer this out though. The current system only discourages artists from donating. In doing so, it not only effectively penalizes artists for being charitable, but keeps art away from the public. That means everyone loses.