Art occupies an interesting 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, however, art should be capitalized by businesses but is not always 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 books, specifically the business accounting books. When a business purchases such art, it must count it as an asset in its accounts, and 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, but art collections that are exhaustible because of display or research applications must be depreciated according to their useful lives.
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.
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For artists, 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, which means deducting the cost of supplies 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.
Dealers vs. Investors
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. Investors, however, buy art so that it will accumulate value for them and such expenses are only deductible up to 2 percent of the investor's income.