Kickstarter and Crowdfunding can provide much needed business funds – and a big tax bill
Kickstarter is a crowdfunding platform for creative projects. Project creators set a funding goal and deadline for their project, and if people like the project, they can pledge money to help make it happen. From movies to books, electronic gadgets to fashion, a wide range of projects raise funds (and in many cases don't raise funds) on Kickstarter. One guy even raised over $50,000 to make potato salad.
While Kickstarter has been a great fundraising platform for a wide range of people who may have had no alternative source of financing, an issue that many people overlook is the tax implications from a successful Kickstarter campaign.
Are Pledges Income or Gifts?
The tax implications are largely driven by the question of whether pledges are to be treated as income or gifts to the recipient? The IRS has not provided any guidance, and there has not been any litigation on the issue that we are aware of. Kickstarter has published a Tax Guide, but in some ways it raises more questions than it answers. Kickstarter states that, in general, "funds raised on Kickstarter are considered income." However, the guide goes on to say that recipients may be able to classify funds as "nontaxable gifts," but doesn't provide any clarity regarding when that may be the case.
As Kickstarter's Tax Guide states, and as seems to be the clear consensus of tax and accounting professionals that have opined on the topic, funds received via Kickstarter are likely to be treated as taxable income in most circumstances. If funds are income, recipients are obligated to report them as such to the IRS, although taxes owed can be offset with business expenses.
If funds are treated as a gift, then they would not be taxable to the recipient, but could be to the gift giver if over the threshold for a non-taxable gift (currently $14,000). Recipients should be cautious though, as it's likely that in only the most clear-cut cases will the IRS consider funds received to be gifts. And even in seemingly clear-cut cases, there still can be issues.
As reported by NBC News, novelist Neil Gaiman raised nearly $50,000 on another crowdfunding platform, www.youfunding.com, to pay for experimental cancer treatment. Gaiman was advised by an accountant that he should not expect the funds raised for his treatment to be reported to the IRS. However, he received a 1099-K form from PayPal, which processes payments for Youcaring.com campaigns that listed the gifts as income. Whether the IRS will ultimately treat the funds as a gift or income is unknown, but, justified or not, failing to pay taxes on funds reported as income on a 1099 is a good way to trigger an audit.
One final issue to consider is sales tax. Many Kickstarter campaigns offer rewards to contributors. These rewards - from t-shirts and bumper stickers to the actual product being developed - may be subject to sales tax. In such situations, the project creator would be responsible for collecting and sending sales tax funds for intrastate transactions to the appropriate taxing authority, while interstate and foreign sales would not be subject to sales tax.
Some Best Practices
If you're planning a Kickstarter campaign, here are a few things to keep in mind:
Budget for Taxes: You need to understand and be prepared for the fact that funds you receive will be treated as income for tax purposes. Therefore, make sure to set aside an appropriate amount for taxes, and if you are an individual or own a pass through entity such as an LLC or partnership, make sure to take these funds into account when making quarterly withholding payments.
Sales Tax: Remember that you may need to collect and pay sales tax related to intrastate transactions, so make sure your paperwork and records are in order, and that you register to pay sales tax with your state.
Business Expenses: While Kickstarter funds may be income and therefore taxable, valid business expenses can be used to offset taxes. If a business is on a calendar year for tax purposes, it may want to conduct its Kickstarter campaign earlier in the year so that it has time to offset income in the same tax year.
If you have any questions regarding the tax implications of crowdfunding, or tax questions in general, please contact attorneys John Mashni at firstname.lastname@example.org or Nick Oertel at email@example.com.
John brings a unique perspective to Foster Swift with his practical experience as an entrepreneur, business owner, and manager. He focuses in the areas of business, tax, intellectual property and entertainment.View All Posts by Author ›