There are many factors to consider when a donor wants to give artwork or artifacts to a non-profit. The Internal Revenue Code (IRC), treasury regulations and I.R.S. publications all detail things that should be considered in order for a donor of artwork to use (and keep) a charitable deduction on a federal income tax return.

Here are some questions you might have about donating artwork and some resources to consider before deciding if making a donation is right for you. Rich can draft a deed of gift or gift agreement between a donor and donee that could help ensure your interests are protected.

Who is Making the Artwork Donation?

Treasury Regulation § 1.170A-1(c)(1) states if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) and paragraph (a) of § 1.170A-4, or section 170(e)(3) and paragraph (c) of § 1.170A-4A.

IRC § 170(e)(1)(A) states that the amount of a charitable contribution of property must be reduced by the amount of gain that would have been ordinary income if the property had been sold at its fair market value

IRC § 1221(a)(3) states that an artistic composition created by a taxpayer (the artist) is not a capital asset, and is thus an ordinary asset.

Ordinary income that is realized from an ordinary asset is generally the fair market value (FMV) of the ordinary asset reduced by the cost basis (costs used to acquire it) of the ordinary asset. Accordingly, the deduction for artwork made by an artist (as defined by these sections of the code) would be the fair market value of the work reduced by fair market value less its cost basis. That would result in a charitable deduction of the artwork’s cost basis, subject to further reductions.

The charitable deduction available to an individual donating artwork who is not the artist, would be the work’s fair market value, subject to further reductions.

What Type of Organization is Accepting the Artwork Donation?

IRS publication 526 explains the amount of a charitable deduction is further reduced based on the type of organization the artwork is donated to. Deductions from donations of artwork can be reduced to 30% or 20% of an individual’s adjusted gross income (AGI) for a variety of factors. IRS publication 526 explains the deduction is reduced to 30% of an individual’s AGI if the deduction is the FMV without reduction for appreciation.

How is the Donated Artwork Being Used?

IRC § 170(e)(1)(B)(i) explains the amount of deduction is reduced to its cost basis if the use of the artwork by the organization it is donated to is unrelated to the basis for its charitable exemption.

Treasury Reg. § 1.170A-4(b)(3)(ii) explains that a taxpayer may establish that the donation was put to related use if, it is actually put to related use or it was reasonable to anticipate that the donation was going to be put to a use related to its basis for its charitable exemption.

What Happens if the Organization Sells the Donated Artwork?

IRC § 170(e)(6)(A)&(B) explains the amount of deduction can be recaptured (reduced after it was taken) if the donation is sold by the donee organization within three years it was received.

IRC § 170(e)(6)(D) explains the amount of deduction will not be recaptured if the organization makes a certification signed under penalty of perjury by an officer of the donee organization which states that the donation was substantially used in a way that was related to the purpose or function constituting the basis for the donee’s charitable exemption and that such intended use has become impossible or infeasible to implement.

How Much is Donated Artwork Worth?

IRC § 170(f)(8) explains that no income tax deduction for artwork is allowed over $250 without a written acknowledgement by the donee. The written acknowledgment should include a description (but not value) of any property other than cash contributed, whether the donee organization provided any goods or services in consideration, in whole or in part, for the donation, a description and good faith estimate of the value of any goods or services referred (if provided), if such goods or services consist solely of intangible religious benefits, a statement to that effect. The term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.

IRS publication 526 explains the written acknowledgment should be received before the deduction is taken.

IRS publication 526 states that an income tax deduction for artwork over $500 requires the taxpayer to submit IRS form 8283 with their income tax return.

IRC § 170(f)(11)(C) explains that an income tax deduction for artwork over $5,000 requires the taxpayer to submit a qualified appraisal of the donated artwork by a qualified appraiser.

Treasury Reg. § 1.170A-13(c) details the requirements for a qualified appraisal and a qualified appraiser.

IRS publication 561 explains that if requested, for donated artwork worth more than $20,000, a photograph of a size and of sufficient quality fully showing the object, preferable a high-resolution digital image must be provided.

What If You Want to Donate But Still Retain Possession Some of the Time?

IRC § 170(o) allows for fractional donations of undivided interests in artwork. This allows the donor and donee to possess the work each year. The donor must continuously donate fractions of the work until the donee owns a complete undivided interest. The donor may take a deduction which is the lesser of the Fair Market Value of the artwork at their initial contribution or their current contribution each time they donate a fractional interest of the artwork. IRC § 170(o) allows the IRS to recapture the deduction if the donee did not have a substantial possession of the property.

Have there been any changes to Donation Law?

IRC §170(b)(I) states that itemized deductions for charitable contributions must be at least .5 percent of the taxpayer’s AGI.

IRC §170(b)(I) also states corporations can only take itemized deductions for charitable contributions which are between 1%-10% of their AGI.

IRC §67 states amount a taxpayer can benefit from a charitable deductions is capped at 35% if the tax payer is in the 37% tax bracket.