In the wake of the atrocities of September 11, many non-profits, both arts-centered and not, immediately rose to the occasion, and set up fundraising events in donated exhibition spaces and on Web sites. The I © NY – ART BENEFIT and Here Is New York benefits are two examples.
A number of artists, citing a shortage of cash but a wealth of artwork, inquired about participating in fundraising events by donating their work. Artists in general are accustomed to giving significant amounts of time and energy to various causes, including annual fundraisers for art museums, non-profit spaces, arts organizations, and other causes such as AIDS.
Since questions about receiving income tax deductions for the charitable donation of artwork come up quite frequently at the Hotline, I feel this would be an opportune time to discuss the issue in detail. (The tragic events of last September aside, I strongly encourage artists to continue to support fellow artists, arts organizations, and other causes on a regular basis, regardless of receiving any benefit in return.) For this installment of Ask Dr. Art, I was very fortunate to enlist the expertise of Gail Rosen, a New Jersey-based CPA specializing in tax law, to offer some insight into how this process works.
Can an artist deduct the fair market value of a work they donate to charity? "No," says Ms. Rosen. According to existing tax laws: "BLOOD, SWEAT, and TEARS are not deductible. Most artwork that an artist still has in her or his possession carries what is called a ‘zero cost basis,’ meaning that the materials used to produce the work should have been taken as a tax deduction in the year they were purchased." What this means is that in the eyes of the IRS your donated artwork is worth nothing more than the sum of its parts, i.e., the total cost of the materials that went into making it.
Ms. Rosen points out that the legal precedent for this was set in a specific tax court memo (Joseph Maniscalco 1978-274, Code Sec[s] 162), which determined that "a professional artist’s allowable charitable contribution deduction for their own labor was limited to her or his cost basis, which is $0." In the Maniscalco case, the artist had donated three of his portrait paintings to various charitable organizations and deducted $600 per painting, totaling $1,800. Prior to donating works, the artist had deducted on his tax returns the cost of the materials used to produce these works. In its ruling, however, the court determined that Maniscalco was not entitled to a deduction for the fair market value of his paintings.
Ms. Rosen further mentioned that the artist made an eloquent plea before the judge on behalf of his fellow artists, who, he felt, were being asked to carry an unfair tax burden. In response, the court stated that he was addressing his plea to the wrong forum—the court does not write tax law, but rather merely applies it as written by Congress. Unfortunately, Ms. Rosen does not expect the tax situation for artists to change in the near future. She does say that: "In the wake of the September 11 disaster, artists who donate their work may not get the tax deduction they expected, but hopefully they helped the cause."
To summarize: If you donate an artwork of your own making, you are only allowed to deduct the cost of the materials once, and cannot claim the full market value of the artwork. Nevertheless, this shouldn’t stop you from donating work, and, obviously, receiving a tax break probably isn’t the primary motivation for doing so. The key is to find the non-profit or charitable organization you feel most strongly about supporting. Some recent art world charitable benefits have been limited to invitation only, but there are plenty of organizations that would be profoundly grateful for your unique form of support.
Gail Rosen, CPA owns a CPA firm in Martinsville, New Jersey, which has provided accounting and tax services to businesses and individuals for over 18 years. Gail has been awarded the Best of the Best Accountant Award by readers of the Courier News, and is a past recipient of the Outstanding Person in Small Business Award by the Somerset County Chamber of Commerce. She is a frequent speaker on business, tax, and accounting issues, and has often been quoted in news articles and seen on TV, including nationally on CNBC. For further information, please contact Gail Rosen, CPA, 2032 Washington Valley Road, Martinsville, New Jersey, 08836; phone (732) 469-4202; fax (732) 469-6291; email email@example.com; or online at http://www.gailrosencpa.com.
This article originally appeared as part of the Dr. Art series, written by Matthew Deleget for the New York Foundation for the Arts. It is for informational purposes only and should not be understood as business/legal counsel. It is reprinted with permission. Special thanks to Gail Rosen.