Most businesses place decorative artwork around the office. After all, it makes both customers and an employee feel more upbeat and gives a positive impression about the business. It could be said that artwork contributes to the overall success of your company. The issue is: can artwork be claimed as a depreciable expense for tax purposes?
No surprise, the answer is, “It depends”. One must determine if the decorative assets are “valuable and treasured” art pieces or tangible property used in the trade or business. If the latter, the artwork must also be subject to exhaustion, wear and tear or obsolescence. Making that conclusion is usually very subjective.
Let’s look at how the IRS has historically looked at depreciation. In 1968 the IRS ruled that a “…valuable and treasured art piece does not have a determinable useful life….Accordingly, depreciation of works of art is generally not allowable”. At that time, depreciation tax laws required a taxpayer to establish any business asset’s cost basis, salvage value and actual useful life. Since it’s extremely difficult to know how long a piece of artwork’s useful life will be, it made sense that you couldn’t depreciate artwork over “X” number of years if there’s no way to identify what “X” is. But in 1981, depreciation tax laws underwent significant change, and then again in 1986 with the Modified Accelerated Cost Recovery System (“MACRS”). MACRS is still in existence today. Now most assets are grouped into classes that have a pre-determined number of years over which each asset are depreciated. The class grouping, not its salvage value and actual useful life, is now the basis for determining over how many years an asset will be depreciated. But, in order to qualify for MACRS depreciation, the taxpayer needs to establish 4 things with respect to the property. The asset must:
- Be eligible property, i.e. tangible property not subject to amortization, or not for which an election was made to depreciate under a method based on number of years;
- Have been placed in service after 1986;
- Be used in a trade or business; AND
- Be subject to exhaustion, OR obsolescence OR wear and tear.
It’s easy for artwork purchased by the business to pass the first two tests. The 3rd test can be assumed if the artwork is displayed in the workplace for employees and/or customers to see. The 4th test is the tough one, but the artwork only has to pass only one of the 3 “OR” criteria. It’s not likely that artwork will be exhausted, i.e. consumed in the ordinary course of business. It’s also difficult for artwork to become obsolete even if its style becomes outdated. So the taxpayer can assert that artwork is subject to wear and tear. It’s hard to think that artwork hanging on a wall or sitting in a display case is enduring wear and tear. However, any professional art restorer would affirm that all artwork, no matter how well protected, will deteriorate over time.
Taxpayers should be prepared to prove all 4 criteria if the IRS examines your tax return. Obviously, the more expensive the artwork you are trying to depreciate, the more likely an IRS agent will try to disallow the expense. You want to avoid potential tax adjustments, penalties and interest. Talk to Gary Kaplan regarding any of your assets and their tax implications today.
