The financial side of art: galleries, artists and commission

Art is not just an expression of creativity and symbolism. It is a tool for expanding the mind; a means of helping us to analyze and understand what a specific combination of elements represent. In this light, art is not completely unlike math and accounting. But does it make sense to say that the value of a work of art can be calculated with mathematical formulas? Similarly, can the future of the art market be predicted by analyzing the past and current trends cropping up in the art world's credit and debit columns?

While the answer is “no” in regards to art as a personal and unique expression, there are certain aspects of art which do enter into the structured world of numbers and calculation. This of course, is in regards to art as business; as a product that is bought and sold and generates profits and loss. So from an accounting or a business major's point of view, art can be reduced to a series of numbers when the personal aspects are ignored in exchange for dollars and cents.

There are many factors that come into play in regards to the business and financial side of the art world. For instance, the fact that art is a luxury rather than a necessity means prices tend to drop during times of war, economic instability, and social or political upset. Even environmental factors such as a severe drought can have a temporary impact on the prices of art. On the other side of the coin, the media's praise or disapproval of a particular artist can have a significant effect on how much goes into the plus column of an artist's financial portfolio.

The amount a buyer is willing to spend also relies on a variety of factors including his present financial condition, his level of expertise at negotiating and his passion for the work of art for which he is vying. Whether their affects are positive or negative, these types of variables simply cannot be molded into universal formulas. Even if one were able to ignore all of these variables, it would still be difficult to create a formula based solely on the history of selling prices. Any pricing formula based on traditional sales patterns would only result in unrealistic values and distorted projections.

Trying to predict the future of the art market, either piece by piece or as a whole, remains difficult due the fact that art is as unpredictable as fashion. An artist or an art style that is the hottest thing going one day can be just as cold the next. Consequently, the amount an individual is willing to pay is not the only factor that comes into play in regards to art and accounting. Additional variables include the condition of the piece, how old it is, how many showings it has been in, how many awards it has won, and the overall quality of the work. As particular artists and styles of art fall into and out of favor with dealers, collectors and scholars, it becomes increasingly difficult for statistics and formulas to be effectively interpreted.

Since the advent of organized barter and trade exchanges, artists have increasingly incorporated barters and trades into their business. Apparently this is a very popular income option for certain artists, especially those who are relatively well known. If an artist is not familiar with the tax laws pertaining to barter and trade in the United States, he may end up in a dispute with the Internal Revenue Service over the amount of tax dollars that may or may not be due on the art that was bartered. There are two basic categories of trade and barter. The first is known as corporate barter, and it usually applies only to the large transactions of multi-million dollar corporations. The second is referred to as retail trade exchange, which is the type of trade in which artists usually engage.

An example of a retail trade exchange would be an artist trading a painting to a jewelry store in exchange for a diamond necklace. Under the new tax laws, each transaction is viewed as separate and distinct. In other words, the transaction is not regarded as a trade but as two separate actions of buying and selling. The artist "sells" a painting for $1200 and "buys" the necklace for the same amount. As a "sale," the money from the painting is viewed as income, meaning normal income taxes do apply. As a "buy," that $1200 is viewed as a retail purchase so therefore sales taxes also apply.

It is vital to an artist's financial survival to track and document sales, primarily for tax purposes. Whether on his own or through the professional services of an accountant, an artist should keep careful track of the personal information and specific details pertaining to the sale of a specific work of art to a particular buyer. Included in this captured information should be the title of the work sold, the dimensions of the piece, the medium used, the year the piece was created and any other pertinent information regarding the work of art in question. Undoubtedly, keeping such detailed records can be cumbersome and often requires the patience and expertise of a professional "number cruncher".

In order to avoid becoming the epitome of the “starving artist”, it is critical to understand the financial aspects of buying, selling and trading art. Many artists tend to overlook the business side of art, when in reality it is the key to their financial success. To many artists, the business end of art is like a thorn in their side. Knowing how to create a basic contract for selling their work or how to track finances, expenses and revenue is something most artists are not interested in learning about. Therefore, the need for professional accountants and business consultants in the art world will most likely continue to exist. Otherwise, there would be a lot more starving artists in the world.