IRS Depreciation Guidelines for Fine Art

IRS Depreciation Guidelines for Fine Art
Firms often collect and display art to impress clients.

Art Is Not Depreciable Under IRS Rules

To be depreciable under basic Internal Revenue Service guidelines, assets must meet four general requirements. Three of these are not at issue for most art used in business: First, the property must be owned by the taxpayer. Second, the property must be used to produce income. Third, the property must be expected to last more than one year. Failing to meet the fourth requirement is why nearly all art used in business is not depreciable: The property must have a "determinable useful life." Accordingly, the IRS has confirmed in Revenue Ruling 68-232 that it does not consider fine art to be depreciable.

Determinable Useful Life Requirement

Having a "useful life" means that the property must lose its value to the business over time -- for example, through wear and tear. Art usually does not meet this requirement, because while it is subject to physical decay over time, this does not necessarily affect its monetary value. That the useful life must be "determinable" means that the loss of value over time must be somewhat predictable -- the taxpayer must be able to tell in advance and within reason just how long he will be able to use the asset to produce income. Art used in business rarely, if ever, meets either component of this fourth requirement.

Tax Court Exception

Very rarely, and under highly specific circumstances, the United States Tax Court has ruled against the IRS position. In each of these cases, the art at issue was not a painting or sculpture on display in an office setting. Rather, these cases involved professional musicians using antique instruments -- highly valuable and considered to be art in and of themselves -- in their performances. Playing the instruments subjected them to a higher degree of wear and tear than mere display would have. For most art-owning taxpayers, this narrow exception will not apply. Even for those who might fit within the exception, caution is advised; taking depreciation on such property could subject the taxpayer to more intense IRS scrutiny.

Gallery Inventory

Otherwise depreciable assets cannot be depreciated if they are your inventory rather than being used by your business. For example, if you run an automobile dealership, the cars in your inventory cannot be depreciated. By the same token, art held to be sold to customers is non-depreciable inventory.

Art for Personal Enjoyment

Art that you own for your personal enjoyment, as opposed to use in an income-producing activity, is not depreciable. IRS rules permit depreciation only on assets used to produce income.