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.
It would appear that recent case law is favorable to the proposition that all artwork, “valued and treasured” or not, is subject to the allowance for depreciation under Sec. 168 if the taxpayer can meet that section’s four requirements described above. But the taxpayer most likely will continue to be in for a fight if the IRS examines its tax return. The taxpayer should be prepared to establish the business reasons for the acquisition of the artwork to meet the “used in a trade or business” standard. The taxpayer also should be prepared to establish that the items are subject to wear and tear or obsolescence in their use. Obviously, the more expensive the artwork, the more likely it is that an agent will disallow a claim of depreciation expense with respect to the item. Rightly or wrongly, field agents continue to adhere to Rev. Rul. 68-232.
it would seem favorable outcomes for taxpayers was when the artwork was used in a trade or business. whether STR would rise to the level of a trade or business would be based on the facts and circumstances in your situation. You really need to get the advice of a tax pro who can review the entire situation. if audited, as noted, you face an IRS challenge, and if you lose, depending on how much your taxes would increase, you could face substantial penalties.
