Presentation
ART
Financial & Tax Implications
Thursday, January 23, 2014
Disclaimer
Isdaner & Company, LLC provides the information in this
presentation for general guidance only, and does not constitute the
provision of legal advice, tax advice, accounting services,
investment advice, or professional consulting of any kind. The
information provided herein should not be used as a substitute for
consultation with professional tax, accounting, legal, or other
competent advisers. Before making any decision or taking any
action, you should consult a professional adviser who has been
provided with all pertinent facts relevant to your particular
situation. Information in this presentation is not intended to be
used and cannot be used by any taxpayer, for the purpose of
avoiding accuracy-related penalties that may be imposed on the
taxpayer. The information is provided “as is”, with no assurance or
guarantee of completeness, accuracy, or timeliness of the
information, and without warranty of any kind, express or implied,
including but not limited to warranties of performance,
merchantability, and fitness for a particular purpose.
Presenter:
Scott Isdaner, CPA, JD
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Managing Member of Isdaner & Company, LLC
Specialty in Tax Area
Over 30 Years of Experience
Art Collector – Works on Paper
Key Tax Issues Affecting
Art Ownership
• Income Tax Planning
• Gift Tax Planning
• Estate Tax Planning
Income Tax Planning:
Classification - Dealer
• Trade or business of selling art or other collectibles
• Collectibles considered inventory
• Does not pay sales tax on purchases but does
collect sales taxes from purchasers
• May deduct all ordinary & necessary expenses
• Taxed at ordinary income tax rates (currently as
high as 39.6%)
• Like-kind exchange provisions do not apply
Income Tax Planning:
Classification - Investor
• Buys and sells art primarily for investment
• Gain on sale of collectibles held more than one year
taxed at maximum capital gains rate of 28% plus
3.8% Medicare surtax
• Like-Kind exchange provisions/Section 1031
• Ordinary & necessary expenses related to the
collection deductible as a miscellaneous itemized
deduction, subject to 2% floor and alternative
minimum tax
Income Tax Planning:
Classification - Collector
• Buys and sells art primarily for personal pleasure
• Gain on the sale of collectibles held more than one year taxed at
maximum capital gains rate of 28% plus 3.8% Medicare surtax
• Not able to defer gain on sale of collectibles under like-kind
exchange provisions of Section 1031
• Ordinary & necessary expenses deductible as miscellaneous
itemized deductions (but only to extent of income earned by
such activity) and subject to 2% floor and alternative minimum
tax
Like-Kind Exchanges of
Collectibles
• Like-kind refers to nature or character of property & not to
its grade or quality
• Grade or quality refers to differences of artists, style,
medium, age, and value
• Section 1031 maintains time requirements to qualify as likekind exchange (identify replacement within 45 days and
acquire within 180 days)
Charitable Gifts
• Individual receives an income tax deduction
• Taxpayer entitled to charitable income tax
deduction equal to fair market value of object
if (1) individual donates art/collectible which
is classified as capital asset to public charity
or private operating foundation and (2)
charitable organization uses object for
purpose/function related to its tax-exempt
status
Charitable Gifts
• Imperative communication with organization to
ensure related use test satisfied
• Special provisions apply to gifts of partial interests
• Annual limitations (30%/20%)
• Qualified appraisals for gifts in excess of $5000
• Charity’s certification of gift and agreement to report
subsequent sale
Art Conservation &
Restoration – Effect on Basis
• Restoration of damaged property can be added to the cost
basis, but collectors must be careful not to endanger the
historical significance by going too far
• IRS maintains that restoration & conservation costs
should be capitalized, not expensed
Sales & Use Taxes
• States are pursuing purchasers who are not paying the
appropriate use taxes on collectibles purchased out of
state or country by examining import declarations and
bills of shipment
• Art collectors have been caught in the middle of
investigations as result of tax avoidance – intentional or
not.
IMPORTANT ISSUES
• Keep complete and accurate financial records of
purchases and restorations
• Maintain an inventory of all art works
Estate & Gift Tax Planning
• Estate of an individual with valuable collection may
have insufficient funds to pay estate tax (Federal rate
40% plus State inheritance/transfer taxes)
• Often, a portion or all of a collection must be sold to
satisfy estate taxes
• A forced sale could result in less than fair market
value for the collection
Planning Techniques:
Lifetime Gifts to
Family Members
• Current law allows an individual to gift $14,000 per person to
as many different individuals as he or she desires.
• If married, spousal consent to the gift increases the annual
exclusion to $28,000 per donee
Planning Techniques:
Getting the Most
Out of the Annual Exclusion
• Items under annual exclusion can be part of a
lifetime gift program
• Gifts of partial interests in more substantial items
may come within the annual exclusion.
• Possession needs to be with the donees
• Gifts can take the form of a minority interest in an
art holding entity over which the collector
maintains voting control
• Future appreciation is out of the donor’s estate
Planning Techniques:
Using the
Lifetime Gift Exemption
• Current amount is $5.34 million indexed annually for
inflation
• Prior to making large gifts, the estate tax savings
should be compared with the potential capital gains tax
to the donee since there is no basis step-up for gifts
and a step-up to fair market value applies to transfers
on death
Planning Pointer
• Gifts of art objects to members of the family may be
difficult to prove to the satisfaction of the Internal
Revenue Service
• Good practice is to have written deed of gift, an
appraisal, change any insurance policies, and a
properly filed gift tax return
Installment Sale of Art
• Basic approach has individual transfer art to intended
recipient in return for installment note
• Price should be appraised fair market value & in
return individual receives promissory note of equal
value
• If individual wishes to retain possession of art, a lease
may be entered into with purchaser at fair rental value
• Accomplishes several transfer tax planning objectives,
primary benefit involves increases in value
Installment Sale of Art
• Possible to defer income taxes
• Alternative: Sale made to irrevocable trust
excluded from the individual’s estate for estate
tax purposes but considered a grantor trust for
income tax purposes – sale would be ignored for
income tax purposes
Transfers to Charity
Upon Death
• Deceased’s estate entitled to estate tax deduction
so that the donated art not subject to estate tax
• Make sure charity will accept art work before
making charitable bequest
Gift Acceptance Agreements
• Many of issues surrounding conflicting
desires can be resolved with an agreement
between donor and the organization
• Agreement can be used for both cash and noncash contributions & can outline terms of the
contribution so that donor & organization
agree on how contribution will be used
Questions?
Thank you
Scott Isdaner, CPA, JD
sisdaner@isdanerllc.com
OUR
ONLY
BUSINESS
IS
YOUR
BUSINESS
ISDANER & COMPANY, LLC THREE BALA PLAZA SUITE 501 WEST BALA CYNWYD, PA 19004-3484
Tel: 610. 668.4200 FAX: 215. ISDANER/ 610.667.4329 WWW.ISDANERLLC.COM
Disclaimer
•
Isdaner & Company, LLC provides the information in this presentation for general guidance only, and
does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or
professional consulting of any kind. The information provided herein should not be used as a substitute
for consultation with professional tax, accounting, legal, or other competent advisers. Before making
any decision or taking any action, you should consult a professional adviser who has been provided
with all pertinent facts relevant to your particular situation. Information in this presentation is not
intended to be used and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related
penalties that may be imposed on the taxpayer. The information is provided “as is”, with no assurance
or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any
kind, express or implied, including but not limited to warranties of performance, merchantability, and
fitness for a particular purpose.