In 1789, Benjamin Franklin wrote, “In this world, nothing can be said to be certain, except death and taxes,” and while they are both generally considered to be unavoidable and unpleasant, fortunately, there are professionals who can make the burden of taxes and other financial obligations somewhat lighter for individuals and businesses.
There are many accountants and accounting firms that specialize in services for the art market. From helping artists file individual tax returns to bookkeeping services, management accounting and budgeting, tax and VAT compliance, annual statutory accounts and audit services for arts-based businesses, accountants can accomplish a wide range of tasks. Catherine Thompson is the Director of Corporate Services Department at Rawlinson & Hunter in London. She said, “We recognize that business owners need to concentrate on the day to day running of the business in the comfort of knowing their financial matters are being looked after by us.”
Rawlinson & Hunter’s client base includes emerging and established artists, dealers, mid-tier to blue chip galleries and collectors. Thompson said, “Our bespoke high end services together with expertise in the art industry is what sets us apart from many accounting and tax professionals.”
What are some of the complexities of the art market that specialized accountants regularly address?
Taxation is always a multi-faceted issue. In the art world, the number of high-value, cross-border transactions that take place on a daily basis add further complication. Thompson said, My particular area of expertise is VAT and I have daily calls from galleries surrounding the complexities of, for example, the margin scheme, agency and consignment stock arrangements as well as the physical movement of works throughout the EU and beyond.” She offered some words of advice, “I always recommend clients pick up the phone before the transaction has been completed. It is always difficult to unravel the facts after a transaction and an additional 20% VAT on top of an expensive artwork could be a deal-breaker for a buyer.”
“The avoidance of taxes is the only intellectual pursuit that carries any reward.” - John Maynard Keynes
Artists themselves also have many considerations when filing their personal taxes. Basil Agrocostea, of Agro Accounting, is a Certified Public Accountant (CPA) based in Brooklyn, who has dedicated his practice to servicing - in his own words - the starving artists. Most are self-employed and are therefore required to pay income tax in the United States by filing the Schedule C along with the standard 1040 return. Artists earning more than $1,000 from the sale of their art per year are expected to file estimated quarterly returns. They are also responsible for paying a self-employment tax (Schedule SE), which covers Social Security and Medicare contributions.
One of the benefits of being a self-employed artist is the ability to “write off” or deduct expenses from taxable income. This can include travel, materials and supplies, legal and professional services, or even the cost of a home studio space, including rent and utilities. However, Agrocostea said that self-employed artists also, “face the risk of being labeled as hobbyists, which disqualifies them from showing a loss on their tax return.” American artists should keep careful records of their sales and may be required to demonstrate their profitability to the Internal Revenue Service (IRS) to prove that they have a legitimate business.
In the UK, Her Majesty’s Revenue and Customs (HMRC) also requires self-employed artists to meet nine “badges” or tests of trade to differentiate between art as a hobby or as a business. These badges include:
- Profit-seeking motive
- The number of transactions
- The nature of the asset
- Existence of similar trading transactions or interests
- Changes to the asset
- The way the sale was carried out
- The source of finance
- Interval of time between purchase and sale
- Method of acquisition
“The hardest thing in the world to understand is the income tax.” - Albert Einstein
For auction houses, galleries and art service companies that are interested in setting up shop in the UK, Thompson says that the local tax code can be confusing. “There are many taxes to consider, from corporation tax, self-assessment tax, payroll taxes and of course the consumer tax VAT,” she said. “It is important for those setting up operations in the UK for the first time to take advice and get systems set up from the outset to avoid HM Revenue and Customs appearing later down the line with a large unexpected tax bill… and penalties!”
What implications do current political events have for accountants who serve the art market?
In the UK, ongoing negotiations for Brexit have created a great deal of uncertainty on a number of issues, not least the effect it will have on cross-border transactions. Thompson expects to receive many more inquiries in the coming months and to help her clients put new systems in place. At the time of this article’s publication, the so-called “no deal” scenario, in which Britain exits from the European Union with no trade agreement in place, seems like a very real possibility. However, there has also been serious discussion of a second referendum. Though the situation appears chaotic, Thompson said, “Once we have greater clarity on what is happening, I expect it will be business as usual.”
According to Agrocostea, “The Tax Cuts and Jobs Act (TCJA) signed by President Trump in December 2017, effective for the 2019 tax year, saw the largest overhaul of our tax system in 30 years.” There are significant changes for both individuals and business owners, including revised regulations for reporting expenses and deductions. The IRS makes several explanatory publications available on its website, but a professional CPA with expertise in the art market can ensure that artists neither under- or over- pay their taxes, according to the new laws in 2019.
"The difference between death and taxes is death doesn’t get worse every time Congress meets." - Will Rogers
Though this year will be a landmark for new tax rules in both the UK and the US, there is even more change on the horizon. New laws will also take effect in the UK in 2020, including the introduction of anti-money laundering regulations. Thompson said, “This will offer greater protection for the buyer, as well the seller, which can only be a good thing.”
One of Rawlinson & Hunter’s clients, a well-established antiques dealer said, “Our family has been looked after by Rawlinson & Hunter, personally and in our business, for three generations. While systems have changed and accounting requirements have become ever more complex, the firm’s partners and staff have remained seamlessly attentive to our needs.”
Join in on the conversation with The Clarion List when you subscribe to THE BUSINESS OF ART.