Thursday, January 23, 2014Thursday, January 23, 2014

Presentation

ART

Financial & Tax Implications

Presentation

ART

Financial & Tax Implications

DisclaimerDisclaimerIsdaner & 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

Presenter: Scott Isdaner, CPA, JD

• 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

Key Tax Issues Affecting Art Ownership

• Income Tax Planning• Gift Tax Planning• Estate Tax Planning

• 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 - DealerIncome Tax Planning: Classification - Dealer

Income Tax Planning: Classification - InvestorIncome 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 - CollectorIncome 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 ofCollectibles

Like-Kind Exchanges ofCollectibles

•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 like-kind exchange (identify replacement within 45 days and acquire within 180 days)

Charitable GiftsCharitable 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 GiftsCharitable 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

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 TaxesSales & 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 ISSUESIMPORTANT ISSUES

• Keep complete and accurate financial records of purchases and restorations

• Maintain an inventory of all art works

Estate & Gift Tax PlanningEstate & 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

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

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

• 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 Techniques:Using the

Lifetime Gift Exemption

Planning Techniques:Using the

Lifetime Gift Exemption

Planning PointerPlanning 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 ArtInstallment 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 ArtInstallment 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

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 AgreementsGift 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 non-cash contributions & can outline terms of the contribution so that donor & organization agree on how contribution will be used

Questions?Questions?

Thank youThank you

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

Scott Isdaner, CPA, JDsisdaner@isdanerllc.com

DisclaimerDisclaimer• 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.