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How to handle a deduction for a charitable contribution for…

How to handle a deduction...
How to handle a deduction for a charitable contribution for art given by the artist or creator of that piece of artwork? This refers to the "materials only" or cost of materials only caveat to the deduction. Please explain using this example so I may understand: an artist does a painting, purchasing paint, canvas, maybe a smaller brush or palette knife, to create a painting, they are good and professional and can sell art too but donate the one work to a qualifying (for IRS purposes) charitable organization during 2017. They have the opportunity to return the palette knife after creating the work. What is the deductible amount for this, and if they paid for the palette knife, but got a refund or partial refund after doing the work, how is the amount used on the palette knife or similar treated, and exactly where is this all reported on the tax return form, so which form and which line, and how exactly is it documented? If the equipment falls apart and can not be reused is the purchase amount included in cost of materials? If reused for another donated work is it only counted cost for materials the first time for the first work, how is that handled? If used to deduct as cost of materials for a donated work of art, can a palette knife be reused or supplies reused if left over on a work not donated and then can that work be sold and how would that affect the value of a sold work? For taxes?
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Answered in 9 minutes by:
10/18/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,845
Experience: Taxes, Immigration, Labor Relations
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The IRS doesn't allow to deduct the value of time or services as charitable contribution.

ONLY actual expenses may be deducted for that purposes.

When the artist can sell art to third party and donate the proceeds - THAT amount will be used as a charitable contribution.

When he artist donated the art work without selling his actual cost - out of pocket expenses - may be used as a deduction.

When tools are used for creation - but the artist continue to use tools or sell them for whatever price - the cost is not considered as out of pocket for that art work.

The cost of materials which are completed used for creation of that donated art work will be considered as deductible out of pocket expenses.

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Customer reply replied 7 months ago
Thanks. If the cost of materials were considered as out of pocket expenses, how are they reported on the return?What if you used a paint or substance that changed after using it so it was not what you wanted and had to redo the work - is the incorrect substance out of pocket? If there is a recall, and it worked but had to be returned is it out of pocket? If it could be returned for a refund for any reason, does that make it so it can not be considered out of pocket, like this happens: you build a housing with a light source and use it then decide an additional one maybe bigger would work in addition to finish the artwork started with the original light housing source, or you could change the work so only the second light source would be effective, and you had reasons to do this, would the original light source be out of pocket expenses? If you get no refund or if part of it was allowed a refund by the merchant? What if you rent a studio, too, is that out of pocket?
Customer reply replied 7 months ago
What if you have to insulate a studio for example, is the insulation out of pocket? Only creating one work this way...if you ever do another one, how do you go back and say it is not out of pocket? That's all I can think of, is there more to this? What form?
Customer reply replied 7 months ago
How are the receipts handled, do you save them? Not attached? Is it treated on a separate form and known as basis or what? Just stop when you want to with these details, I thought they were all part of the original question...thank you.

No need to report separately - the cost of materials.

You will need to calculate charitable deduction on a separate note - and keep it with other supporting documents - do not send to teh IRS.
On your tax return - report the deductible amount on schedule A line 17

https://www.irs.gov/pub/irs-pdf/f1040sa.pdf

You will need all that information if audited to proof your deduction.

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Regarding the cost to insulate a studio... while the studio is used to create the ark work - you are not donating the studio.

When you simply use the property for charitable purposes - that value is not considered as donation for charitable purposes.

We may not deduct a contribution of less than your entire interest in property.

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Customer reply replied 7 months ago
Thank you. If you can, the cost to insulate or insulation itself is not cost of materials out of pocket for the donated work by the artist?When you say the deductible of the entire interest in property, what do you mean by that? If it was standing, and purchased by you entirely, and used for that work, the whole thing could be deducted? Except if used for successive works?
Customer reply replied 7 months ago
if continued use it is not deductible.

When you say the deductible of the entire interest in property, what do you mean by that?

As that was your studio - which was insulated - if you transfer the entire studio to the charitable organization - that will be consider the transfer of the the entire interest in property.

If however you allow the charitable organization to use YOUR studio or you simply USE your studio for charitable purposes - that will be donation of the partial interest in property.

Another example related to the ark work...

If you give the art work to be used by the charitable organization - for instance for 10 years - and after that they must return it to you,

or if you just allow to use that art work - but do not allow to sell it - both these situations illustrate a donation of a partial interest.

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Customer reply replied 7 months ago
Thank you! So if I use a new studio would that be a cost of materials deduction if I paid for that studio and donated one work of art created by myself, the artist? (Hypothetical), and if I owned a studio but insulated it or prepared it to make the work and then donated it, is that out of pocket cost I can deduct? If I used that same studio to create more than one work or different insulation for the second work, or use it for subsequent works that can be sold on the market, how is that in each situation treated for deduction purposes relating to out of pocket costs the artist can deduct if donating the art to the organization that qualifies? If I rented a studio and did the same thing, or used an old studio and did the same thing, how is that treated? And if I owned the old studio in this how is that treated? How would it be treated if I used it for new sold on the market works then another donated one? Thank you.

Any costs associated with the studio may not be deducted as charitable contributions UNLESS that studio is used EXCLUSIVELY for charitable organization.

When you donate a work or art which you created - your charitable contribution is the cost of material used to create that item. The cost of tools or the cost of space you used while working on that item is NOT included the cost of that item.

Separately you may deduct the cost related to the studio if that studio is used for charitable purposes.

You may deduct actual utilities, maintenance, etc - but may not deduct capitalized (improvement) expenses which are added to the basis.

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Customer reply replied 6 months ago
Thank you! What important information. So if the studio itself is used for charitable purposes only, it can be deducted? Is this only once? If it is reused but only for charity can it be deducted for each donation of artwork or each tax year or what? How are insulation or changing the lighting or something else like covering parts of it to protect against fumes or sprays, related? Is a new brush used a materials cost? I thought it may be. Palette knife? They are all different sizes and have specific uses for all of history as art evolved.

The "use" of the studio is not deductible.

That is what the IRS consider "a contribution of less than your entire interest in property"

But if you provide the studio - not for your own use - but for use of the charitable organization - out-of-pocket costs related to that may be deducted as charitable contributions.

When the studio is used by YOU - even it is used to create art works you will later donate - that "use" is not deductible.

Only the use of the qualified charitable organization may result in deductible donations.

Improvements - such as insulation or changing the lighting are capital expenses and may not be deducted unless the studio itself is donated to the charity.

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Customer reply replied 6 months ago
when you say "use" of the studio is not deductible if you use it, what do you mean exactly? And tools, how do they differ from materials, can you give an example, like brushes vs. palette knife or chisel perhaps? I can see and have seen since I am an artist, where a structure can be built to create a certain thing, it is not as common as painting, but I am curious as to how that relates to the whole picture, and if built and modified...from what you have said it seems none of this is deductible by the artist if they donate their own work with that involved, or is that not true?
Customer reply replied 6 months ago
From the last part of the answer you gave, it seems clear about this, but if you do not mind giving the examples and addressing my perhaps redundant questions I just wrote it would be fine. I will then be ready to rate.

So when you say "use" of the studio is not deductible if you use it, what do you mean exactly?

I meant the "use" as an opposite to gifting.

If you own the studio and gift it to the charitable organization - the value of the studio is deductible.

If you allow the charitable organization to use the studio - the value of the studio is NOT deductible.

And tools, how do they differ from materials, can you give an example, like brushes vs. palette knife or chisel perhaps?

There is no clear cut determination what is considered materials and what are tools.

However - some small tools may be treated as materials.

The IRS defines the term “materials and supplies” as tangible property used or consumed in your business operations that fall within any of the following categories:

  • any item of tangible personal property (unit of property) that cost $200 or less
  • any item of personal property with an economic useful life of 12 months or less, and
  • components acquired to maintain or repair a unit of tangible property—that is, spare parts.

The cost of such items may be deducted in the year the item is used or consumed in your business.

To use this deduction, you are supposed to keep records of when such items are used or consumed in your business.

There is no separate definition for charitable organization - but till some extend we might be able to use the above.

You might know better how items are specifically used in your trade.

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Customer reply replied 6 months ago
Thanks. This definitely helps and has answered five-stars about this. One last thing - if you buy materials and create your own work of art then donate it to the qualified charity, for IRS purposes in 2017 - if the materials were used and found to be partly defective, and the merchant took the materials back and gave a refund for them, then you bought another one or set to finish the work, what is the deductible? If reused, say a half tube of oil paint was left then reused for a donation by the artist themselves, do you only deduct half? If the materials as a surprise were used then able to be returned for refund, is the original cost deductible? And last, does the IRS or has it left this "open" as they prefer to monitor and audit to insure accuracy or protect against possible fraudulent or deceitful reporting?
Customer reply replied 6 months ago
When I asked as a surprise, I meant: if the materials were expected to be used completely but as a surprise worked better or well only partially used, then could be refunded...

Only actual expenses are deductible.

Expenses that you had refunded may not be included into the cost basis - no double dipping...

If paid and used a half of tube - the cost of that half is included into the cost.

The IRS would generally "believe" to amounts reported on the tax return.

If audited - they will verify if deductible amounts are supported by confirmation letter from the charitable organization.

That is very rare situation when the IRS woudl go into details to verify itemized costs for materials used like in your example.

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Customer reply replied 6 months ago
Since you need to prove your deduction, do you save the receipts from cost of materials in this example here, or is that not necessary? I understood you do not have to send the calculation or proof to them with the return. When do you have to?
Customer reply replied 6 months ago
Thanks.

Current regulations require to have supporting documents - so you do need to keep receipts to substantiate deductions.

However - not juts receipts - but a record of all your expenses.

For some expenses below $75 receipts are not required - but a record of expenses should be maintained.

While receipt might be not required - still it is recommended to have them - for instance if you have zero receipts - that woudl not look good if audited...
You do not need to proof your deduction UNLESS audited. In this case - yes - supporting documents which proof deduction must be provided.

Otherwise - all supporting documents including calculation are kept with your other tax documents and should not be sent to the IRS.

Lev
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