I just met with my accountant today and this came up. Does anyone know what the rule is on this? My accountant seemed to think that as the artist I can only deduct what it cost to make the item but since I am already deducting the cost of supplies that there would be no deduction for the donation. Does that sound right?
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I'd go with Lois on this, your accountant should know this or look up the rule and NOT guess at it. Lois is also right, you can only deduct the net donation after the cost of the goods received in value, you should receive some acknowledgment from the nonprofit (a letter usually) thanking you and telling you what portion of the "fee/donation" is tax deductible. Conversely if you buy something at a silent or live auction that benefits a nonprofit for more than it's retail value you can deduct the difference between the retail price and what you paid for it as a donation.
Lastly, raffle tickets: when you buy a raffle ticket where the proceeds go to a nonprofit. Raffle tickets are NOT considered a donaton by the IRS since there is an anticipation of winning a physical thing in return for your purchase. I believe that a raffle item valued above a certain amount ($2,500 or $5,000 I can't remember) must be reported to the IRS by the nonprofit and the winner must pay taxes on the value of it.
martha
Your accountant is correct. If you donate something that is your inventory and you sell this type of thing, you only get your cost (which you have probably already included in your business expenses). The IRS never gives you anything for your time. Just like a person who works a full time job and gets a W2, they don't get anything for their time either.
I'm under the impression that you donated a painting here, not that you bought something or got anything in return.
If on the other hand, you are an art collector, and donate a piece from your collection, you would get fair market value for it. So when you donate something like this, it's good to donate things that have appreciated in value, because you get the deduction for the higher value without having to pay taxes on the gain on the sale of the item.
I am a tax accountant (in my paying job). I doubt Lisa's accountant was guessing, she maybe needs to be a little more confident when telling her clients bad news. Amazingly, unless I missed something in scanning this, it appears that all the advice given in the previous comments is correct!
Also I should add that if you barter your art for something else, that is still a taxable transaction (ie a sale for you.) So it seems that trading paintings in order to donate one doesn't really make you come out ahead. If you trade a $400 painting for someone else's $400 painting, you just had a $400 sale which is taxable income to your business. You now have a $400 basis in the painting, which you deduct $400 (fair market value) for on your tax return, and it's a wash. You are ahead only the supplies/materials that you expensed. Sorry to be the bearer of bad news here!
If, in the previous example, you hold the $400 painting until the artist is dead, famous and now it's worth $4000, well then you'll have a $4000 deduction! Good luck with that!
Roxanne - items donated (that you purchased or owned not made )that are valued in excess of $500.00 need to have a specific IRS form fill out accompanied by an appriasal. The IRS does not take your word for it that the object, collection, whatever is worth that amount of money. When my husband died I donated his entire office of techical books to the university library where he taught. 1) I had to value the donation and 2) if it exceeded $500.00 I had to go about getting the books appraised and obtaining the form if I wanted to claim a tax deduction for more than $500.00. I took the easy road of valuing the whole bunch at $400.00 and waving goodbye to them and letting some students pack them up and haul them away.
martha
This drives me crazy. My background and degree is in Accounting and I specialized in Tax accounting. I didn''t get my CPA because I was able to move on to painting as my full time job a couple years after leaving University. Thank goodness because accounting is sooooooo boring to me. Anyway we all get hit up for donations. There is one group I can't say no to because a close friend is involved with the Lupus Foundation, so I do donate a piece for that once a year. I explained to the director about how our donations worked with taxes. She was so suprised because that is not what they were telling other artists. They then talked to their tax accountant and was told that I could write off my value of my painting or what the painting sold for at auction, which ever was greater. I don't know who their "tax account" is or where he/she pulled that out of their behind, but the truth is I can only write off supplies. They refused to believe me, but went with their "tax expert". In the end it only matters what I do on my taxes and the risk I am willing to take. FYI I have a low risk tolerance when it comes to the IRS.
In the above example I think you still would get a write-off for some of your labor. If you had $50 worth of materials in a ptg selling for $400 and sold it to another artist(collector) and then purchased say a glass sculpture from her for $400. then I think technically you could get a $400. deduction for donating the glass sculpture since you also are now a collector. The glass artist could also get a deduction for donating your painting. Obviously you would have to pay taxes on your income but you still get a bit more deduction than your $50. in materials. I may be reading this wrong but that's how I was thinking.
I believe this issue came up 20 some years ago when artists wanted to donate important pieces to museums but couldn't get much tax write-off. This scheme was discussed then but I don't know what the resolution was. Maybe the IRS put the kibosh on that whole idea anyway.
Brian, the 400 ends up being a wash:
+400 (income from sale of your painting to other artist)
- supplies/materials
-400 (charitable contribution from donation of $400 painting you bought from other artist)
Actually it may not even be a wash because the $400 income goes on before AGI (adjusted gross income) is figured. The $400 deduction comes off after AGI is figured, and then only if you itemize. If your AGI is up $400 this could affect many other things (deductions for medical, misc itemized, and student loan interest to name only a few.)
And no, you never get a deduction for your labor. In the example above you still only got a deduction for your materials.
In the research I did on it it looks like it has come up a couple of times in congress to give incentive to important artists to donate during their lifetimes. I assume the bills didn't pass since the write-offs for the donations are not currently allowed. After the artist dies the estate can deduct the value of any donations the estate makes. So after I'm dead and famous at least my heirs can benifit :).
If my accountant "seemed" to think this.......... and didn't know the rule........ I'd get another accountant. (since that's his/her job to know!) 8-)
"seemed" was my wording. She was pretty darn sure and said "that's how I understand it." I was just double checking here because it doesn't seem right to me. But then who ever said the tax codes make sense. :)
Cost of materials only is the rule as I understand it. One work-around I have heard of is for two artists to purchase a work of equal value from each other and then each donate them to charity. This is not perfect but seems to accomplish the goal.
At almost every show I am asked to donate an item for one charity or another and I have yet to come across one of these solicitors who know the rules. When I educate them they are typically in disbelief.
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