Small Business Accounting - Crowdfunding websites such as Kickstarter, GoFundMe,
Indiegogo, and Lending Club have become increasingly popular for both
individual fundraising and small business owners looking for start-up capital
or funding for creative ventures. The upside is that it's often possible to
raise the cash you need, but the downside is that the IRS might consider that
money taxable income. Here's what you need to know.
What
is Crowdfunding?
Crowdfunding is the practice of funding a project by
gathering contributions online from a large group of backers. Initially used by
musicians, filmmakers, and other creative types to raise small sums of money
for projects that were unlikely to turn a profit, now it is used to fund a
variety of projects, events, and products--and has even become an alternative
to venture capital for some.
Are Funds I receive Taxable?
All income you
receive, regardless of the source, is considered taxable income in the eyes of
the IRS--and that includes crowdfunding dollars.
Say you develop a prototype for a product that looks
promising. You run a Kickstarter campaign to raise additional funding, setting
a goal of $15,000 and offer a small gift in the form of a t-shirt, cup with a
logo or a bumper sticker to your donors.
Your campaign is more successful than you
anticipated it would be and you raise $35,000--more than twice your goal. Let's
look at how the IRS might view your crowdfunding campaign:
Taxable
sale.
Because you offered something (a gift or reward) in return for a payment pledge
it is considered a sale. As such, it may be subject to sales and use tax.
Taxable
income. Since you raised $35,000, that amount is
considered taxable income. But even if you only raised $15,000 and offered no
gift, the $15,000 is still considered taxable income and should be reported as
such on your tax return--even though you did not receive a Form 1099-K from a
third party payment processor (more about this below).
Generally, crowdfunding revenues are included in
income as long as they are not:
- Loans that must be repaid;
- Capital contributed to an entity in exchange for an equity interest in the entity; or
- Gifts made out of detached generosity and without any "quid pro quo." However, a voluntary transfer without a "quid pro quo" isn't necessarily a gift for federal income tax purposes.
Income
offset by business expenses. You may not owe taxes however, if
your crowdfunding campaign is deemed a trade or active business (not a hobby)
in that your business expenses might offset your tax liability.
Factors affecting which expenses could be deductible
against crowdfunding income include whether the business is a start-up and
which accounting method you use (cash vs. accrual) for your funds. For example,
if your business is a startup you may qualify for additional tax benefits such
as deducting startup costs or applying part or all of the research and
development credit against payroll tax liability instead of income tax
liability.
Timing of the crowdfunding campaign, receipt of
funds, and when expenses are incurred also affect whether business expenses
will offset taxable income in a given tax year. For instance, if your
crowdfunding campaign ends in October but the project is delayed until January
of the following year it is likely that there will be few business expenses to
offset the income received from the crowdfunding campaign since most expenses
are incurred during or after project completion. As such, you would not be able
to offset any income from funds raised during your crowdfunding campaign in one
tax year with business expenses incurred the following tax year.
Non-Taxable
Gift.
If money is donated or pledged without receiving something in return, it may be
considered a "gift," and the recipient does not pay any tax. Up to
$14,000 per year per recipient may be given by the "gift giver."
How do I Report Funds on my Tax Return?
Companies that issue third party payment
transactions (e.g. Amazon if you use Kickstarter or PayPal if you use
Indiegogo) are required to report payments that exceed a threshold amount of
$20,000 and 200 transactions to the IRS using Form 1099-K, Payment Card and
Third Party Network Transactions.
These minimum reporting thresholds apply only to
payments settled through a third-party network; there is no threshold for
payment card transactions.
Form 1099-K includes the gross amount of all
reportable payment transactions and is sent to the taxpayer by January 31 if
payments were received during the prior calendar year. Include the amount found
on your Form 1099-K when figuring your income on your tax return, generally,
Schedule C, Profit or Loss from Business for most small business owners.
Don't Get Caught Short.
If you're
thinking of using crowdfunding to raise money for your small business startup
or for a personal cause, consult a tax and accounting professional first.
Don't make the mistake of using all of your
crowdfunding dollars on your project and then discovering you owe tax and have
no money with which to pay it.
We're
here to help! For no obligation free consultation contact us today!
Amare Berhie, Senior Accountant
(651)
300-4777
