Monday, April 30, 2007

ASK THE TAX PRO - SALE OF ARTWORK

Here is a question I received from a long-time friend and client, the Executive Director of a membership organization for artists.

(Q) Here's something that's come up at work, and I wondered if you could give me your opinion. At our exhibitions, for example, one artist sold a painting for $5,200.00. Of that, the host site retains a 20% “donation” and our organization retains a 20% “donation”. The artist would like a letter stating that she donated 20% ($1,200.00) to us and same to the host site. Is that correct? It is she who would be considered making the donation, and not the buyer, is that correct? The buyer received goods in value of $5,200.00 so I don't see how that could be a donation on the buyer's part.

(A) In the situation you described no one is making a donation.

You are correct that the buyer is not making a donation. The buyer is purchasing artwork for $5,200.00.

The seller is also not making a contribution, but paying a sales commission. The artist would have gross income of $5,200.00 and a commission deduction for $2,080.00 (20% + 20% = 40%) on Schedule C. The artist would report net taxable income of $3,120.00.

A contribution is an itemized deduction and reduces taxable income. A business expense, such as a commission, reduces Adjusted Gross Income, which could have a multitude of side benefits (see my post on THE MOST IMPORTANT NUMBER ON YOUR TAX RETURN), and reduces net earnings from self-employment, which will reduce self-employment tax (FICA equivalent). So a business deduction is more better than a contribution deduction.

Plus, a contribution is a voluntary gift to a charity. The 20% + 20% are mandatory reductions of the sale price - an expense of sale.

Methinks that the artist in question wants a letter to support a contribution deduction because he/she is not going to report the sale of the artwork on his/her 1040.

TTFN

1 comment:

Lizina said...

Good for people to know.