How Donors of Art Can Benefit the Most

By NICOLE LEWIS

Donors can get significant tax breaks by giving works of art to charity. But getting

maximum benefits can be tricky.

At a minimum, donors can write off the amount they paid for the art pieces they give to a charity. But if they want to deduct the market value of the donation — often a much larger sum — they have to demonstrate to the Internal Revenue Service that the non-profit group has kept the artwork for at least two years and put it to use in a program that is related to the organization’s purpose. If it is sold right away or not used for a charitable purpose, the donor can deduct only the amount he or she paid. (Similar rules cover donations of other collectible items, such as stamps, jewelry, and antiques.)

Following are the basic considerations:

Artwork must be contributed to a charity, not a foundation or government agency. The I.R.S. says that for the donor to get the full deduction the artwork has to go to an organization that has broad public support — not to a foundation set up by a single donor or family.

The artwork must meet special standards. To be eligible to take the maximum deduction, the contributor must have owned the art for at least a year and it must have increased in value. At the other end of the spectrum are works donated by artists themselves. If an artist gives a charity a piece of art, no matter how much its value has appreciated, the artist can only deduct the cost of materials used to create the piece. The same rule applies to gifts of art a donor receives directly from the artist and then turns over to a charity.

Artworks must be used for a charitable purpose. Donors have to prove that their art is being used as part of a charity’s programs and helps the organization accomplish its mission. In a hypothetical example published in a guide for taxpayers, “Charitable Contributions” (Publication 526), the service said that if a college displayed a donated work in a library so students could study it, that would be considered a related use. But if the college chose to sell the painting and use the money for education programs, the donation would be considered unrelated — and the donor could write off only the amount he paid for the artwork. However, not all cases are clear-cut — mainly because the charity and the I.R.S. may have different ideas about how an art program furthers the charity’s purpose. The I.R.S. has published some private-letter rulings to clarify the issue, but they don’t cover all circumstances that a charity and donor might encounter.

Some fund raisers say that the “related use” rule is unfair and that donors should be able to get the same tax benefits by contributing to any charity of their choice. Colin V. French, a fund raiser at the Boy Scouts of America’s Dallas headquarters, argues that charities would benefit just as much by selling a donated artwork as they would by keeping it.

The value of a gift of art must be assessed by a qualified appraiser. Such appraisals are required for all works valued over $5,000. Donors must provide a detailed description of the item, the terms and time frame of the donation, and the appraiser’s qualifications, background, and method of valuation. If the work is valued over $20,000, donors may be asked to submit an image of the work. I.R.S. Publication 561, “Determining the Value of Donated Property,” can act as a guide.

Although a detailed appraisal is not required for works worth less than $5,000, all donors of artwork who are seeking a tax deduction must fill out Form 8283 and attach it to their tax return with some supporting statement of value, such as a letter from an appraiser or another art expert. The same form is required for all non-cash gifts to charity that are worth more than $500; it must be signed by both the appraiser and the charity.

Other considerations. Responsibility for sifting through the rules and attaining an appraisal lies mainly with donors (and their lawyers), although the charity must furnish a letter saying how it intends to use the gift.