Although Internet based crowdfunding has been around for at least five years, a large degree of ambiguity still exists around how to file taxes for money raised. With no definitive ruling from the IRS as to how crowfunded money is to be taxed, the burden of making sure that everything is in order rests completely on the head of the person (or entity) raising the funds. This is a scary responsibility to take on for most people raising money via crowdfunding. However, listed below are some recommendations by experts in tax law, whom we interviewed, that should help to simplify the task. (Disclaimer- These are general guidelines and should in no way replace the advice of a professional accountant):
Are rewards being issued?
The majority of campaigns are being hosted on reward-based platforms. Depending on the structure of the campaign and the level of donation, the rewards offered may be intangible, such as a thank you e-mail or an honorable mention on the company’s website, or it may be tangible, such as a small token of gratitude or a pre-sale of a product. Tangible gifts may include products or services.
If the perks are not tangible then it’s not taxable, as no sale has occurred. In this case, donations are considered gifts, which according to the IRS, is the responsibility of the giver. This donation is not taxable up to $14,000 per person for a single donor or $28,000 per person for married couples.
If the reward is diminutive compared to the amount given, such as a gesture of gratitude, then no transaction has taken place. For example if a funder were to donate $50 and they were to receive a mug or a calendar as a thank you, this would not count as a transaction but rather a gift.
If the rewards issued are tangible and comparable to what the market price would be for that good, then it is a business transaction, and any profit derived from the sale is considered taxable income. If production expenditures match or exceed business earnings, then you may not owe anything. In other words, if the difference between the amount received and the cost of providing the perk/merchandise comes to zero or less, no tax payment is required.
If you are a registered non-profit organization or are partnered with a non-profit organization, and have applied to the IRS for tax exemption status, then you will owe no tax on income earned.
Does the reward have a well-defined market price?
If the reward has a well-defined market price and is being pre-sold or sold at a comparable price, your state government may expect your customers to pay a sales tax. Check your state laws regarding sales, particularly concerning Internet sales. (http://www.nolo.com/legal-encyclopedia/50-state-guide-internet-sales-tax-laws.html)
Are you an artist?
Pre-selling or offering up as a perk paintings, movies, publications, or other forms of physical media where the amount donated to receive a particular perk is comparable to the market price of the good may be subject to a sales tax.
If you are offering a reward where your costs of production are less than the amount earned through crowdfunding, then the profit is considered income and is subject to an income tax.
However if production costs exceed the amount received then no income is earned and income taxes are not applicable.
If producing an audio record, for example, and all the money received go to studio fees, no taxes have to be paid. Any income, meaning any monetary gain derived after considering the costs of production, is subject to a tax.
Are these funds being raised for a charity or registered non-profit organization?
The IRS lists the types of organizations that fall under charity and non-profits that qualify for tax exemption as well as criteria required to achieve exemption. Note that even if an organization is recognized as a non-profit it is the organization’s responsibility to apply for recognition. (http://www.irs.gov/Charities-&-Non-Profits/Types-of-Tax-Exempt-Organizations)
Donors can only receive tax deductions if they donate to a registered 501(c)(3) non-profit organization or a qualified charity organization. If a perk was received, the donor can only deduct the amount that exceeds the market value of the perk. (http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions) Donations to a cause, unless associated with a non-profit organization or qualified charity organization is not tax-deductible.
Did you raise more than $200,000 from more than 200 transactions?
Crowdfunding platforms do not handle any of the monetary transactions; those services are outsourced to third parties such as Amazon Payments or PayPal. The IRS therefore requires that you fill out form 1099-K, which ensures that online sales are reported and allows the IRS to track transactions for tax purposes. You should receive Form 1099-K upon earning $200,000 from 200 transactions. (http://www.irs.gov/uac/Form-1099-K,-Merchant-Card-and-Third-Party-Network-Payments) If you don’t receive a form, contact the company that processes these transactions to make sure a form hasn’t been filled out for you.
Do you have international donors?
Backers should not have to worry about customs fees because backers are making donations and not necessarily purchasing goods from retailers.
One difficulty may arise your campaign includes perks that fall under multiple taxation criteria, whereupon best judgment based on the information above must be made. Regulations associated with crowdfunding are still under development, but it is the campaigner’s responsibility to evaluate the appropriate criteria for taxation.
Special thanks to Ron Worsham, Associate Professor of Accounting at Brigham Young University, and Randy Stucki, Audit Intern at Ernst & Young