Crowdfunding has become the new popular way for people to try and start a new business or product idea, along with trying to raise funds for causes which they feel deserve fundraising. Using sites such as indiegogo, Kickstarter or gofundme, individuals create a page showcasing their particular idea or need and using the power of social media try to raise money, up to a certain goal, at which point the project is considered funded.
Often, donors are given a form of incentive for their donation, which can quickly complicate the tax situation as it relates to crowdfunding. As is typical, the technology has far outpaced the law, leading to the need to fit interpretations of current law to imperfectly fit to a new set of circumstances.
No consideration given for the funding
As is the case for smaller donations in projects or for social contributions, often nothing is given in return for the donation other than a quick thank you email or similar de minimis gesture. For the donor and donee, this is the simplest from a tax perspective, as it is treated as a gift. The donor would have to report this on any gift tax return filed (and often the amount is immaterial and can be simply considered de minimis) and the recipient does not recognize any taxable event for the receipt of these small donations, as they are non-taxable gifts.
Consideration is given for the funding
For medium to high value contributions to projects, often the project will give the donor something in return for their donation – a t-shirt, the final product, etc. then there can be significant tax implications to this. Under current law, this would be considered a sale for the retail value of the item, which would be income to the recipient. The recipient would have to report these sales on the appropriate tax return for their business structure, and would be able to take expenses (such as marketing and productions costs) against this income.
With the “sale” of tangible goods, the problem of sales tax can also arise for crowdfunding campaigns. Generally speaking, one should charge sales tax on most sales of tangible property in states where they have sales tax nexus, or more simply a physical presence. For example, a campaign based in NY should charge sales tax on those sales to customers located in NY, but not in CA, where they do not have a physical presence. Careful analysis should be done as to what was “sold” and for what retail value during the campaign, and if the sale itself is taxable.
An even newer phenomenon that is starting to occur is the crowdfunding of equity in business startups. The recently passed JOBS Act now allows non-accredited investors to participate in equity financing in startups, clearing a major regulatory hurdle which could have completely shut down equity crowdfunding before it got off the ground.
For tax purposes, an equity contribution is a non-taxable event, meaning that the contribution of equity does not result in income to the recipient nor a deduction to the contributor. Depending on the structure of the entity, information such as name, address, SSN may be required so that the taxpayer can receive information on their investment for their personal taxes at year end (see prior articles on Entity Structures and Pass Through taxation).
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.