Nonprofit Accounting Basics
Get Smart About Art Donations
The majority of non-cash giving in the U.S. comes in the form of donated household goods, like gently used clothing, books, and blankets. But according to the Internal Revenue Service Statistics of Income Bulletin, many taxpayers are donating higher value items like real estate and automobiles as well as art and collectibles. For the tax year 2010, which is the most recent on record, 84,600 taxpayers reported gifting art and collectibles for a total of $1.275 billion dollars. One reason donated art and collectibles make up a sizable portion of the philanthropic giving landscape made in the U.S. each year is because there are notable tax benefits available to donors who gift artwork. Determining how much deduction is available can be challenging and depend on a number of factors. While it is not recommended that your organization give tax advice to donors, it is important to know the potential benefits some of your donors will be receiving by making a gift of this nature.
Receiving Donated Artwork
Before the donation takes place, it would be prudent to establish an understanding with the donor to make sure their expectations are being met. How the artwork is intended to be used, how long it will be kept for and the value of the item should be discussed and even formalized in an donor agreement if need be.
If the donor intends on taking a tax deduction of more than $5,000, it will need to get an independent qualified appraisal within 60 day of the contribution date to do so. The Treasury Regulations are specific about what makes an appraiser 'qualified', but generally the appraiser should be someone who has credentials in the relevant field in order to make appraisals on the type of property being valued. Once the appraisal has been conducted, the donor must complete IRS Form 8283 since the value of the gift exceeds $5,000. The appraisal should be attached to the form and both the done organization and the appraiser should sign. Additional requirements apply to artwork donated with claimed value of $50,000 or more. If the organization disposes of the gift within three years of the date it was received, it must file Form 8282 within 125 days after disposition.
For donations of artwork of $5,000 or less, the donor is not required to get a qualified appraisal. While it would still be beneficial to do so for documentation purposes, the donor may use less costly methods for determining fair market value of the artwork. Your organization is required by generally accepted accounting principles (GAAP) to keep such assets held at fair market value for book purposes, but valuation information will also be helpful if the item is given away at a raffle, for example. If the donor is unwilling or unable to provide fair market value information to your organization, enlist the help of an appraiser or use alternative methods to value the asset. This generally means surveying the market price of recently sold similar artwork.
Capital versus Ordinary
The donor should determine if what they are donating is a capital asset or an ordinary asset, as it will impact the nature of the deduction available. Most all donated artwork will have capital asset status. Property has capital gain status if its sale at fair market value results in a long-term capital gain. In other words, the asset has been held for more than one year. Common examples of capital assets are stocks, bonds, jewelry, coins or stamp collections, and cars or furniture used for personal purposes. Capital gain property offers the biggest deduction allowable to the donor, which is full fair market value on the date of the donation.
Artwork that is created by the donor, received by the donor as a gift, is held as inventory by a dealer or owned for one year or less at time of donation is considered ordinary income property. Donation of ordinary income property offers a more limited deduction. Donors can deduct their basis in the property, rather than the fair value of the item, as a deduction on their tax return. An artist's basis is the cost of materials used to create the artwork, such as the canvas, paint and brushes. There have been attempts to change these rules, which many artists deem unfair, but so far such attempts have not made it past committee in congress. For the foreseeable future, artists will continue to have a much lower deduction than collectors.
Use of artwork after receipt
How the donee organization uses the art after it has been received will also impact the deduction for the donor. Your organization can keep it for display, store it, sell it, or give it away. The regulations say that if artwork will be donated as a capital gain asset that it be used by the recipient organization in a way that relates to their mission. If this is the case, the donor's artwork will retain the capital gain property distinction and will allow a full fair market value deduction. If the organization sells or gives the artwork away, or uses it for some unrelated purpose, then the deduction is reduced by any capital appreciation essentially making it limited to the cost basis of the property. Note that what is 'related use' can be subjective and based on the interpretation of facts and circumstances. This can be best demonstrated by the following examples:
Example 1: Donor has a valuable Monet painting that was purchased years ago. The painting is donated to the local ministry for display. The donor's deduction is limited to cost basis since the artwork was not put to a related use by the recipient organization. It is not the ministry's purpose to display artwork.
Example 2: The same donor donates the painting to an art museum. The museum may or may not display the painting in its gallery in the immediate future. The donor's deduction is the full fair market value of the artwork since the painting will be put to a related use.
To get an idea of how the IRS looks at the related use test, one can look at their private letter rulings for guidance. In one ruling, the Service held that lithographs being donated to a camping center devoted to handicapped and mentally challenged children were related use because they were being used in connection with an art appreciation program. Another ruling shows that the Service allowed the related use argument when a donor gave his collection of porcelain art objects to a public charity operating a retirement center. The reasoning was that since the display of art was part of creating a living environment for its residents, that it was related to the charity's exempt purpose.
It is clear the IRS is more interested in the artwork being actively used in furtherance of the organization's mission. Merely displaying art that depicts the organization's mission may not be enough to establish related use. If your organization is in this situation, it may want to consider developing a clearer and more direct connection to the exempt mission for purposes of the related use test, especially when such artwork qualifies for capital gain property status.
Gift Acceptance Policy
Receiving unusual or nonstandard gifts can be both beneficial and burdensome. Developing a gift acceptance policy for nonstandard gifts can be very helpful in making sure these transactions go smoothly. Such a policy covers different categories of nonstandard gifts, such as collectibles, oil, gas, and mineral interests, charitable gift annuities and so on. Cash and securities are not considered nonstandard as the value for these items is easily identifiable and there is no speculative nature to them. A gift acceptance policy allows for the organization to tactfully decline gifts that serve no use or would not benefit the organization in any meaningful way. These policies also cover review provisions for nonstandard gifts so that the board or management has a chance to evaluate the gift, providing an extra layer of due diligence.
There are big opportunities for nonprofits willing to solicit and accept donated artwork as part of their fundraising plan. The preceding discussion should act as a good primer on this topic, but by no means is it exhaustive.