Technical stuff first...
IRS
Publication 526 (click title for link to entire document)
Excerpt...Amount of
deduction.
The
amount you can deduct for a contribution of ordinary income property is its fair
market value less the amount that would be
ordinary income or short-term capital gain if you sold the property for its fair
market value. Generally, this rule limits the deduction to your basis in the
property. Okay...I
read the publication and I am still confused...
Ok,
I know I am a little slow sometimes. But what does that mean in English? If I
had a bowl that I would normally sell for $100.00 and in scenario 1 I donate it
and it sells for $50.00 and in scenario 2 it sells for $1,000.00 would the
deduction be the same? Yes,
The deduction is limited to the out of pocket dollars the artist has
invested in the piece!
$100.00?
Yes,
but only if you report the $100 as income as well as a deduction.
Or
am I still lost? Yes
Or in other words...
You go to the wood pile, find a piece of wood, which you paid nothing
for, turn a magnificent piece that you price at $100. You also finish the
piece with a $1 cost of materials. Before it sells you decide to
donate it to a charity auction. They are able to get $500 for it.
You have two choices of how to treat this on your tax return:
1. Report the $100 as income and claim the $100 as a contribution
letting the minor expenses take care of themselves on your Schedule C, or
2. Forget the income and contribution and just let the minor expenses
flow through your Schedule C.
If the artist paid for the wood and other finishing materials and is
"not in a trade or business" i.e. does not file a Schedule C, the out
of pocket expenses of creating the piece would be deductible on Schedule A
as a contribution.
The Fair Market Value of the piece is not relevant when
considering value to the creator of the work of art.
If the artist is incorporated the value of a contribution will be handled
automatically as a cost of goods sold.
In a nutshell...
Basically
the IRS does not consider your time invested in creating the work to be
deductible. Even if this is your full time employment? Or in my case as a
part-time artist my ‘out of pocket dollars’ only relate to materials and not
the hourly rate I would normally charge for my turning time?
Correct, for tax purposes of a sole proprietor
his/her time has no value.
Marc Schreiber spent
35
years with the government of which 25 was as an auditor and then a Revenue
Agent (Corporate and large multinationals) He is now retired and happy to
restrict his calculations to perfecting the golden rule.
Tim
Yoder has been turning for over 10 years and mangling his tax returns for over
30 years and is still often confused about deductions and turning.
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