I have seen both terms used for a variety of items and I was wondering if historians differentiate between the two concepts? Are they essentially categorizing the same idea? Is it a matter of intent? Skill? Gender? Status?
For example, it's fairly common to see a detailed, handmade 18th century quilt labeled as "folk art" despite the utility of the item (keeping people cozy in cold weather) while an equally detailed example of decorative embroidery from the same period might be labeled as "craft" or "handiwork" despite it's definitional decorative use.
Related - Are these definitions only used for Anglo-American hand work or are there similar differentiations when looking at art and craft from other regions? Western Africa, China, and India all come to mind with a history of craft and art that are treated as interchangeable by European sources, but I must assume there is a distinction between the two in other cultures as well. Or am I being too eurocentric with that assumption?
I doubt we can find a universally accepted, rigorous means to differentiate between folk art and folk craft. I think you are already heading in the right direction, namely that folk art is something that has a decorative element and folk craft produces something that is strictly functional. The problem with attempting a sharp division between the two is the fluidity of practice: folk crafts may produce things that are functional, but they would commonly include decorative elements, and some expressions of folk art may seem purely decorative, but they often also had a functional aspect: decorations on the side of a barn may seem strictly to be folk art, and yet when asking the farming family about it, they may just as easily insist that the symbols protect the livestock and other things housed within, making this functional and more like folk craft.
Both folk art and folk crafts are within the domain of folklore (both as an aspect of culture and as the discipline that studies these things). As with all things folklore, definitions are problematic, and how these terms are used can vary from person to person and place to place. That said, I don't think you'll find many people who make "differentiations when looking at art and craft" in a European or other context.