Art occupies an interesting and challenging place in the world of accounting and taxes. It operates in different ways depending on how and why it is purchased. Its value can changed based on whether it is a current piece of art or a historical piece, and different rules may apply from state to state.
In general, art should be capitalized by businesses in the company accounts. But is not always tax deductible, at least not immediately by most investors. However, how the art is used does play an important tax role and some deductibility may be possible.
Capitalization vs. Depreciation
To capitalize a piece of art is to account for its value in the books, specifically the business accounting books. When a business purchases such art, it must count it as an asset in its accounts. If it donates such a piece of art, then the gift must be recorded at the date of donation, subtracting the asset.
Inexhaustible collections of art where the estimated useful life is so long it cannot be determined are not depreciated at all. However, art collections that are exhaustible because of display or research applications must be depreciated according to their useful lives.
Historical Cost of Art
When capitalizing the cost of art, the historical value of the piece of collection is an important consideration. When a business purchases a piece of art, it must be recorded at the historical cost. This means that the art is not simply worth market value for a similar piece of art, or as much as its composite materials, but as much as its historical value gives it. The history behind a piece of art can raise its value and require the business to record a higher cost for the piece.
The IRS's Art Appraisal Panel, comprising up to 25 renowned art experts who give their services for free, is a specialist service that evaluates the fair market value to support a claim for works of art.
Deductions for Artists
For artists, sculptors and those who create art works, creating art generates ordinary income when the art is sold, according to Internal Revenue Service regulations. The artist cannot make a deduction on the sale, but most artists can deduct qualified creative expenses. This means deducting the cost of art supplies, paints, brushes, canvasses and similar costs as business expenses. If an artist gives a work to charity, then only the material costs can be deducted, not the fair market value of the piece of art.
Dealer vs. Investor Deductions
For collectors that purchase art, there is an important difference between buying as a dealer and buying as an investor. Dealers buy art to sell it to customers in the ordinary course of their business. They can deduct ordinary business expenses in many cases, such as storage, rent, travel and the costs of sale.
Investors, however, buy art so that it will accumulate value for them. Such expenses used to be deductible up to 2 percent of the investor's income. However, the Tax Cuts and Jobs Act has gotten rid of such miscellaneous deductions through 2025.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.