Crowdfunding is an increasingly popular way to raise money for individuals and businesses. But there is both risk and reward for those managing or participating in a crowdfunding venture. Take for example Coolest, which raised over $13.2 million to launch its stylish cooler. Although the campaign was very successful, many donors never received their coolers and the company eventually closed. The Oregon Department of Justice also launched an investigation. Business owner Ryan Grepper was ordered to pay $20 to each of the 20,762 donors who never received the product as promised. It was an expensive lesson for all parties involved.
Although this was an extremely unfortunate situation, it does highlight some of the legal issues that may arise from these types of fundraising campaigns. Not to mention the tax consequences associated with them.
Personal Fundraisers & Taxes
It’s not unusual for people to use crowdfunding to help raise money for those in need or worthy causes. Whether it’s a medical treatment, memorial fund, or a tuition-assistance campaign, you’ll find thousands of people seeking donors on sites like GoFundMe.com.
Do Recipients Pay Taxes?
Generally, donations made to personal fundraisers are considered gifts and are not a taxable source of income for the recipient. There are, however, some exceptions. For example, donations made by an employer to an employee are generally included in their gross income. You could also be required to pay taxes on any portion of a donation that exceeds the $15,000 annual gift tax limit. If you provide a gift or token of gratitude in exchange for the donation, it also complicates matters.
Are Organizers Taxed?
Similar to donees, organizers typically don’t pay taxes on donations made through crowdfunding. If you organize a fundraiser, just be sure to keep detailed records. You’ll need to account for every penny and show that you did not receive any of the proceeds.
Can Donors Claim a Deduction?
Donations made to a personal fundraising campaign, however, aren’t tax-deductible for the donor. Only donations made to qualified charities are eligible.
It’s also important to note that there could be tax consequences for any donation made in exchange for goods and services. As a donor, you can only deduct the amount given minus the value of the goods or services received if donating to an eligible charity. For example, if you donated $45 and received a t-shirt valued at $20, your total deduction would only be $25. As a recipient (non-charity), any donation received in exchange for goods and services could be considered taxable business income by the IRS.
Crowdfunding & Taxes – Small Business Owners
Crowdfunding platforms like Kickstarter are a great way for businesses to raise money. Unlike personal fundraising campaigns, however, businesses that use crowdfunding to raise money will almost always pay taxes (state and federal) on those proceeds.
Generally, funds received by a business through crowdfunding are considered taxable income unless they are:
- Loans that must be repaid;
- Contributed in exchange for equity in the business; or
- Gifts made out of detached generosity and without anything given in return.
Thankfully, you may be able to offset some or all taxable income received by claiming project-related expenses. If you have startup costs, research and development fees, or manufacturing expenses, these can help reduce your tax liability. The timing of your crowdfunding campaign can also assist with helping to reduce your taxes. Launch in Q1 to ensure you have ample time to offset revenue with expenses incurred throughout the year.
Reporting Crowdfunding Income on Your Business Tax Return
When you file your business tax return, you’ll need to include any taxable income on it. The crowdfunding platform should send Form 1099-K no later than January 31 for any proceeds received in the previous tax year if it exceeds $600. Even if you don’t receive a 1099-K, you’re required to include this income on your return. Most small business owners will use Schedule C, Profit and Loss from Business, to report these funds. Make sure you maintain accurate records of all transactions, as well as any expenses related to your crowdfunding campaign. Keep these for at least three years, just in case you are audited by the IRS.
Get Professional Tax Help
If you’re thinking of launching a crowdfunding campaign to raise capital for your small business, it may be a good idea to consult a tax professional first. At Tax Defense Network, our tax experts can evaluate your tax situation and provide advice to help set your business up for success. Call 855-476-6920 for your free consultation today!