Art is beautiful. The visual effect it gives to homes or offices is second to none. Apart from being used as decorative elements, good paintings, and pictures can help relieve stress, and help make a good impression on visitors at home or workplace, although you may not know it, and clients themselves may not even realize it.
Art appreciation goes beyond the visual appeal, and the different emotions we feel when we come in contact with a piece of art that connects on a deep level. If you're a true art lover, then you wouldn't mind spending money to support your passion.
Fortunately, under certain conditions, you can be eligible to claim a tax write-off on art as a strategy of reducing your income tax. And that is what we'll cover in this article.
Art and Taxes
Whether you can be able to deduct expenses incurred during producing, purchasing, managing, or selling artworks depends on how the Internal Revenue Service (IRS) classifies your interest and intentions and based on that, IRS classifies you either as:
- An artist
- A dealer
- An investor, or
- A Collector
Generally, Artists, Dealers, and investors are allowed to claim expenses incurred in the process of creating, acquiring, transporting, or preserving art, provided that these expenses are incurred as normal and ordinary business expenses.
Collectors, on the other hand, are not allowed to claim these types of deductions, but there are certain tax benefits they can get when they're selling or giving out their art as donations.
Let's see a brief overview of how the IRS defines these sets of people.
Artists — these are people who create works of art.
Dealers — These are people who deal in artworks. For you to be classified as a dealer, you have to be able to prove to the IRS that your interest in art is not anchored based on a mere hobby, because you can not deduct expenses and losses associated with hobbies.
Investors — to be tagged as an investor, you must be able to show that art is primarily collected for investment purposes. As such, the IRS will have to determine the purpose of acquiring the artwork, the length of time it spends in the individuals' possession, and the investors' other businesses.
Collectors — these are people who appreciate art and keep collections of art for personal enjoyment. These categories are not allowed to deduct expenses incurred in acquiring and maintaining art, but they can receive some favourable tax treatment when they sell or donate their collection.
How artworks can become a tax write-off
As I already mentioned, being eligible for a tax deduction for artwork depends on how the IRS classifies your interest and intentions in art. In general, you could be eligible for a write off if:
- You're purchasing it for business purposes to be used in your business environment.
- You're donating to a non-profitable or charity organization.
- You're the one creating it.
One of the benefits you get as an art collector is that you can write off the value of the art when you're donating it to a non-profitable organization.
When you donate your artwork to a non-profit organization, you can be able to deduct the value of the art at the time of the donation, irrespective of the amount you paid to purchase it.
What it means is that if the value of the art is appreciated while you were holding it, you'll end up taking a big tax deduction, which will be an advantage on your part. But for this to happen:
- You're required to own the art for at least one year for you to be able to deduct the increased value.
- And, you can only deduct up to 30% of the adjusted income in an asset that has appreciated, unless the appreciation is subtracted from the fair market value when you're claiming your deduction.
Organizations to which you can make deductible donations must be non-profit in nature. Here's a list of qualified organizations:
- Religious organizations
- Charitable organizations
- Educational organizations
- Organizations for literary purposes or those that prevent cruelty to children or Animals.
Depending on the value of the art you're willing to donate, you may be required to come up with an appraisal. The IRS doesn't ask for an appraisal for arts within the value range of $500 - $5000, but if the estimated value exceeds $5000, then you'll be required to get an appraisal for the piece.
Art for workspace
If you operate your business through a space set up for work in your home, or if you have an office space, you could be able to write off the cost of purchasing art for it. The IRS allows you to deduct all expenses related to running your business, including your office expenses.
As a result, you can claim a deduction for the expenses you incurred while purchasing artwork, together with other items for your office decorations, although it may need to be depreciable. If the artwork is regarded as “ Treasured and Valuable”, then it's not depreciable.
Remember, you must own a business to write this off as current tax codes do not allow someone simply remote working to be allowed to deduct this on their tax forms.
According to IRS provisions, small businesses (measured by businesses that bring in a yearly revenue less than $2 million ) can claim tax deductions on expenses they incur in the process of running their business. If you're an artist, then you're entitled to this benefit just like other small businesses.
But you may have some difficulties when it comes to claiming losses against income as an artist.
This is because of how strict the IRS is when it comes to what they tag as “hobby business”. For your art endeavours to be treated as a business rather than a hobby, you'll need to sell enough art, and be able to make a profit for three, out of the preceding five years.
As an art creator, you can also donate your artwork, but you only get to write off the cost of producing the piece, rather than its normal market value, since there isn't a provision that lets anyone deduct their time.
Rather than being obsessed with how you'll be able to write off the money you spend to purchase art, you should try to wrap your head around understanding how your interest in art is going to be classified by the IRS. Because by understanding the basic information that is associated with acquiring art, you can be better informed, and be in a much better position to make spending decisions.
One more thing, this article is provided for illustrative and educational purposes, and not in any way intended to substitute for legal, tax, or investment advice. So it's always advisable that you speak to your lawyer or a tax expert to guide you when dealing with matters such as this.