Getting Creative: What You Need to Know About Donated Art
While nonprofit organizations receive a fair amount of cash donations, they’re often at the receiving end of other types of gifts, among them a variety of household objects. But, as the IRS reports, a growing number of people are giving higher value items--real estate, vehicles, even high-value collectables. Taxpayers report giving, in total, over a billion dollars in artwork, in part because of the tax benefits available for such donations.
While it is certainly not the duty of the nonprofit to offer tax advice to donors, it is important for the organization to understand the implications of accepting art and collectables as a non-cash contribution.
When art is donated
When someone donates artwork, it often comes with some expectations. As a recipient, you should make sure that you’re on the same page as the donor--how will the artwork be used, how long should you keep it, and what is the value? In some instances, it may be useful to create a formal agreement.
Know that for artwork that qualifies for a tax deduction over $5,000, an independent appraisal by a qualified professional within 60 days of the donation will be necessary. This is typically the responsibility of the contributing party. After appraisal, the donor should complete IRS Form 8283 and attach the two. The appraiser and organization should also sign the form. In instances where the artwork is worth more than $50,000, additional paperwork is required.
Should the nonprofit get rid of the artwork within three years of the date it was donated, it must file Form 8282 within 125 days, which is something your nonprofit accountant can help direct and complete.
Though appraisal is not required for artwork worth less than $5,000, you’ll still need to know market value. If the owner doesn’t know it, you may still want to get an appraisal, which will make your life easier if you choose to auction the artwork off, for example.
Capital assets and ordinary assets
It is up to the donor to establish whether or not they’re giving a capital asset or an ordinary asset, though most artwork is a capital asset. If property can be sold for fair market value that results in long-term capital gain, it qualifies as a capital asset--think stocks, jewelry, and valuable collections. For donors, the largest tax benefit occurs when something qualifies for capital gain status because it can be deducted at full market value.
Artwork that the donor creates and then gives is ordinary income property, as is artwork that is gifted to the donor, held as inventory by the dealer, or has been owned for less than one year at the time of donation. Donors receive a deduction based on their basis in the property and not the value of the item, which means an artist can deduct the cost of creating the artwork, but not how much they think it will sell for.
Using the artwork
Nonprofits have several options for donated artwork. It can be displayed, stored, sold, or given away. If something is donated as a capital gain asset, it must be used by the nonprofit in a way that relates to their mission. If it is sold or given away or used outside of the work of the mission, it is reduced by capital appreciation and limited to cost basis.
There is a lot of grey area here, so a good nonprofit bookkeeper can be valuable for non-cash donations. While it can be slightly more complicated to accept donated art, a little creativity can go a long way!