FredrickTax.com - Crowdfunding & Taxes

Crowdfunding & Taxes

Case 1 - Medical Mary

Mary was in a bad accident, and found herself owing $25,000 in medical bills! Anna, Mary's sister, heard about crowdfunding, and thought maybe we could raise money on the internet to help pay this bill?

Case 2 - Marlon's Moonshine

In Marlon's neighborhood, he's known as the "Moonshine Man." Although illegal, Marlon has been perfecting his distilled spirits for years, and many think he should make a real business of it, and go legit (which means coming out of the woodwork, paying all taxes, and following all regulations). Marlon would love to start his own business and open a small spirits shop, but doesn't have the money? Could he find the cash using the internet?

What is Crowdfunding?

Crowdfunding is a way to ask for cash from a large group of people using the internet. Causes can be for social issues, business ventures, or any number of individual needs! Successful projects have included new ideas like Oculus Rift, and charitable campaigns like the ALS Ice Bucket Challenge. Platforms designed for this are numerous with different model types to choose from. Popular sites include Kickstarter, Crowdrise, GoFundMe, and Indiegogo. Each has their own rules on fees and how funds are released. Different models include straight donations, to receiving equity in a business, loan structuring, to receiving samples or gifts in return.

Case 1 - Medical Mary

Mary and Anna set up a crowdfunding project with GoFundMe to help pay the medical bills. All their friends and family chip in; some gave $10, some gave $1,000! Huge success! After paying fees (some platforms charge 5% of total, 3% for credit card processing, and 20-30¢ per donation), Mary received $30,000 and tax form 1099-K from GoFundMe.

Case 2 - Marlon's Moonshine

Marlon sets up Marlon's Moonshine and starts a crowdfunding campaign using Kickstarter. He asks for $100,000 to start a small distillery and storefront. He sets up a rewards model so for every $20 donation, he gives a drink sample ($5 value) in the form of a drink chip. He also wants a high-quality look, and acquires merchandise for his shop. For a $50 donation, he gives 2 drink chips and a "Marlon's Moonshine" T-shirt ($20 value). For $100, 5 drink chips and a hooded sweatshirt ($40 value). His campaign was so successful, that after fees to Kickstarter, Marlon receives $125,000!

I donated! What are my tax rules?

A Charitable Contribution is a voluntary donation made to a section 501(c)(3) organization. Organizations must file for this exempt status. Donations are deducted the year they are given, and do have deduction limits. Gifts can be given up to $14,000 per year before any taxes apply. You cannot deduct donations to an individual or private business as a charitable contribution.

Case 1 - Medical Mary

With the $30,000, Mary was able to pay the $25,000 medical bill, and is putting the accident behind her. Following rehab, Mary took the remaining $5,000 and paid for a nice vacation for her and Anna. It was Mary's way of saying thank you to her sister.

Case 2 - Marlon's Moonshine

Marlon receives a $125,000 payment and tax form 1099-K from Kickstarter. He uses the funds to legally set up Marlon's Moonshine, and sends the drink chips and gear to the donators. His distilled spirits are a big hit and Marlon's Moonshine is a big success!

I received donations! What do I owe for taxes?

Many crowdfunding tax issues have yet to be firmly established, and future court decisions and IRS rulings will clarify this new innovation for years to come. In most cases, a recipient of a gift does not face a tax bill. Although, receiving a gift to pay a medical bill and to pay a personal bill has two separate tax consequences. The big distinction is whether the donation is used for a charitable purpose or with intent to make a profit. Businesses using this model will have taxable income from any cash donation. Instead of offering stock in their company, a firm can raise money by asking for donations and offering rewards of product samples or other merchandise. The taxable funds are equal to the net profit made on the donation minus related fees, rewards, and expenses.

Case 1 - Medical Mary

Mary brought her 1099-K to her tax pro indicating a $30,000 net payment, along with her $25,000 in medical expenses from the campaign. The tax pro finds ways to deduct the medical expenses from the funds, but still shows a difference of $5,000 where no medical expenses can support the income, and could be considered taxable. The crowdfunding campaign never indicated donations for a vacation, and this income cannot be backed up with a medical expense.

Case 2 - Marlon's Moonshine

Marlon includes the 1099-K form with his tax packet, and sees his tax pro. The net $125,000 from Kickstarter is deemed taxable income. What helps Marlon was the "rewards" piece to the campaign, as the drinks and shirts are considered expenses against that income. If $20 was donated and they received a $5 token, then the taxable income is reduced to $15.

The 21st century brings new innovations and technologies, and with it, tax rules and regulations that must adapt with it. Don't wade through these murky waters alone. Find your own tax pro partner at Fredrick Tax.

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