Is office artwork depreciable property?

• Author: Bakale, Anthony S.

Many professional offices contain decorations (artwork, knickknacks, sculptures, memorabilia, etc.). Whether that office belongs to a Fortune 500 company, a professional services firm, or a familyowned business, some decorations are usually around to make customers feel comfortable and to give the business an air of success. Or they could be there just because the decorator said they were necessary. Whatever the reason, tax practitioners' clients may ask whether the decor's cost is depreciable for tax purposes. The tax practitioner likely will answer, "It depends."

Say a client recently remodeled its offices and, in the process, purchased new furniture, carpeting, telecommunications equipment, and artwork. In a detailed review of the asset listing and supporting documents, the tax practitioner finds that the client spent a significant sum on the artwork. The invoices reveal that some items were purchased at local galleries, others directly from freelance artists, and others from furniture and office supply stores. The prices range from a couple hundred to several thousand dollars. Further inquiries to the client reveal that regardless of the items' cost, they all are treated pretty much the same. None are protected from breakage, damage, or day-to-day wear and tear.

Whether the items are depreciable depends on the client's answers to further questions. It may depend on whether the decorations are considered "valuable and treasured" art pieces or just plain tangible property used in the trade or business, subject to exhaustion, wear and tear, or obsolescence. The distinction, however, may be subjective and uncertain, with little helpful guidance.

In 1968 the IRS issued Rev. Rul. 68-232, in which it held that:

[A] valuable and treasured art piece does not have a determinable useful life. While the actual physical condition of the property may influence the value placed on the object, it will not ordinarily limit or determine the useful life. Accordingly, depreciation of works of art generally is not allowable. [Emphases added.] This ruling has become the standard for whether office decorations, including artwork, are depreciable; however, the IRS has since then been fairly silent on depreciation of office decorations or artwork displayed in an office. The revenue ruling lacks guidance on what constitutes a valuable and treasured work of art.

Therefore, until the IRS publishes a bright-line test or safe harbor, whether artwork and other office decorations are depreciable is often in the eye of the beholder.

Analysis of Applicable Law and Arguments

In 1968, when the IRS issued Rev. Rul. 68-232, depreciation of tangible personal property was determined under Sec. 167. Under the general regulations for this section (Regs. Sec. 1.167(a)-1, last amended in 1972 (T.D. 7203)), to claim depreciation for property used in a trade or business, the taxpayer is required to establish the property's cost basis, useful life, and salvage value. Based on the law in 1968, the IRS's position with respect to valued and treasured artwork made perfect sense. It would be difficult to establish a useful life for valued and treasured pieces of art that were already hundreds of years old. But more important, since valued and treasured artwork would be expected to appreciate in value, its projected salvage value would most likely exceed its cost, thus leaving zero as the depreciable cost. Depreciable cost was a sum of the taxpayer's basis (or original cost) less the estimated salvage value.

However, the depreciation rules have undergone two significant amendments since 1968. The first occurred as part of the Economic Recovery Tax Act (ERTA) of 1981, P.L. 97-34 (see ERTA Sections 201 and 203). For most tangible personal property, these sections replaced the depreciation determined under Sec. 167 with the accelerated cost recovery system (ACRS) as provided in new Sec. 168.

Sec. 167(a) allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property used in a trade or business. Sec. 167(b) provides, "For determination of depreciation deduction in [the] case of property to which section 168 applies...