What do I need to know about crowd funding and taxes?

crowd surfer © by Photos by Mavis

Question: I’m interested in accepting donations from a crowd funding website. What do I need to know about the taxes?

I’ll do my best to answer your questions, but I have to include this disclaimer:

The Internal Revenue Service hasn’t published specific guidance on the tax consequences of receiving money through crowd funding sites like Kickstarter.

I’ll also explain that I am a very conservative CPA. I do not take risky or unsupported positions. You may get a different answer from another CPA or tax professional.

As the term suggests, crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowdfunding has its roots in charitable causes, including the advent of microfinancing to provide financial services to poor people, but has progressed to the online funding of creative and other projects via sites like Kickstarter and Rockethub.

Crowd funding income can be treated as the following:

  1. A donation to a 501c3 tax exempt charity.
  2. Investment in a business by an investor seeking a share of ownership (called equity owners)
  3. Gift given by an individual to an individual. Gifts are typical when no business or potential profit motive is evident. Examples of gifts include a wedding, funding an adoption, helping a family whose house was destroyed by fire or a person with a medical illness.
  4. Taxable income for a for-profit business. Most businesses give a reward in exchange for the income. This reward may be considered a sale of a good and subject to sales tax in your state (and you thought all you had to worry about was federal income tax!)

 

For a micro business owner, #1 and #2 do not apply. It is my opinion that #3 Gift does not apply to micro business owners either

#4 taxable income is the only option that applies to micro businesses launching a crowd funding campaign.

 

Carol Topp, CPA

Here is my disclaimer:

Nothing contained in this email was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

 

Using crowd funding to raise money for your book, music CD or film project

Credit http://banklesstimes.com/2013/01/10/kickstarter-vs-indiegogo-tale-of-the-tape/

wrote a blog post over at Publishing Basics on

Pros and Cons of Kickstarting Your Project

Kickstarting (or, more broadly, crowd funding) as Phil explains, is  “an Internet-based program where creative people can pitch potential supporters to raise funds to produce a short- or feature-length film, record music, publish a book, and many other products.”

Here’s an excerpt from Phil’s article:

Other People’s Money – Maybe you don’t have the cash or credit to fund your own book, but if you can convince others that your book is worthwhile, you might be able to raise the money. You can remove your risk by raising all of the funds you need.

Don’t underestimate the value of helping others feel good. You’re helping others pay it forward. There is great value in allowing others to help you reach your dreams.

Pre-selling With a New Spin – Pre-selling is tough enough. With Kickstarter you’re basically pre-selling copies of your book (and recognition for the assistance) to your network of friends, family, co-workers, and anyone looking for a way to help.

Read the other pros and cons of crowd funding  here.

 

That got me to thinking (with my CPA-tax mind): How does the IRS see income from crowd funding sources like Kickstarter?

The accounting software company, Outright.com, has an informative page about taxes from crowd-sourcing income.
http://outright.com/blog/accounting-for-crowd-funding-what-you-need-to-know-before-starting-a-kickstarter-campaign/

The IRS will probably see income from crowd funding as exactly as Phil described: pre-selling books. That means the income from Kickstarter is taxable to a micro business owner selling a book or CD.

Sorry, to be a downer here, but you need to know that there is no free lunch when it comes to crowd funding!

Carol Topp,CPA

What is crowdfunding and can a teenager get in on it?

Credit: http://www.salon.com/2013/04/10/kickstarter_just_might_get_you_audited_partner/

What is crowdfunding?

The word seems to be a hot term that’s used everywhere. Anytime someone needs to raise some money for a project they turn to crowd source or crowd fund. But what exactly does that mean? Well Venturebeat.com best describes it as:

“crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowd funding has its roots in charitable causes, including the advent of micro financing to provide financial services to poor people, but has progressed to the online funding of creative and other projects via sites like Kickstarter and Rockethub…” Read more on VentureBeat

Can a Teenager Start A Crowdfunded Project?

Crowdfunding may not work for micro business owners under age 18, because legal contracts with minors are not legally binding, so most investors will not make a contact with a teenager.

But with that said, there are a few teenagers that have used sites like Kickstarter to launch their project. In fact, I just wrote a blog post about a teen who crowdsourced an iPad app last week, you should check it out. You might also want to check out his Kickstarter page to see that the project wasn’t launched under Emerson Walker’s name, but his father’s instead. This is most likely because of my reasoning mentioned above, legal contracts with minors are not legally binding.

Keep Good Records and Be Careful Not To Get Audited

Another thing to keep in mind is that any funds that you make off of your crowdfunded project are considered “taxable income” by the IRS. Even though you are not selling a product via a crowdfunding site like Kickstarter, the IRS will see the transaction as a taxable income because the IRS defines gross income from ‘whatever source derived,’. You can read more about this on Salon.com.

But crowd funding is definitely something to keep in mind for your future.

Carol Topp, CPA

 

P.S. Here’s a neat story of how some students pay for college through crowdfunding: New crowd funding site helps kids with little money achieve big college dreams

 

 

Teen entrepreneurs use mom’s Facebook connections

Credit: Reuters/Jim Young

Great blog post by Deborah L. Cohen over at Reuters on how a mom is using her social networks to help her son’s micro business.

When mother of three Angela Allyn takes to Facebook, it’s usually not to post pictures of her latest party, but to drum up business for her entrepreneurial teenage son, Alec.

“Teenage boy available for schlepping, sitting and various cleanup. Message me if interested” is her typical post. She has put her social networking skills behind Alec’s business in part because she realizes that the traditional job market is tight and “it’s really hard to get a job as a young person.”

There’s anecdotal evidence that an increasing numbers of teens are filling the gaps in the economy and their wallets by doing odd jobs or selling the technical skills at which many excel. And their parents are promoting them — via Facebook, LinkedIn, neighborhood chatrooms and more.

Allyn advertised on Facebook and Craigslist for her son in part because at his age, 15, Alec’s own network includes few people with hiring potential. He hasn’t built a website, she said, largely because it might draw interest during periods when he is overloaded with schoolwork and extracurricular activities. The two have worked together to research how to price jobs but she leaves it to him to work out the details.

Read the full article.

Don’t you wish you had a mom like that?

How have your parents helped you start or run your micro business?

Carol Topp, CPA

 

 

Donald Trump Endorses Teen Author And Entrepreneur

 

HoustonGunnHe’s only 16 years old and he has already reached the goal of publishing a book.

Teenage entrepreneur Houston Gunn wrote a book titled, “Schooled for Success: How I Plan to Graduate High School a Millionaire” when he was just a freshman in high school. After writing his book, he decided to set a goal that his book would be published by the time he was 16. Not only did he manage to get his book published within his goal, he also was able to receive an endorsement for the book from none other than business person and entrepreneur, Donald Trump.

In Mr. Gunn’s book he explains that high schools are not teaching teenagers to succeed or become entrepreneurs. Instead you are taught that if you get good grades, graduate, go to college, graduate with a degree and get a good job that you might make a million by the end of your lifetime.

Mr. Gunn explains in his book that teenagers need to be given the opportunity to try entrepreneurship. In the book he gives teenagers tips from other entrepreneurial-minded students and adults about if you just have the courage to ask, there’s the possibility that you can get exactly what you want.

This is something that happened to Houston during the initial stages of pre-launching his book. During the pre-launch staging of his book, Houston sent out hundreds of requests for interviews to people who he admired. While many didn’t respond, one and only one did; that was Donald Trump.

Trump agreed not only to endorse the book, but also to write a blurb which now appears on the cover of Houston’s book, “Schooled for Success: How I Plan to Graduate High School a Millionaire”. Houston said that the nice endorsement is helping to promote his book; which its sales are helping to put Houston at his million-dollar goal by graduation.

Read more of Houston Gunn’s story in the article titled, Meet Donald Trump-endorsed teen author who wants to make $1M by graduation, on Upstar Business Journal’s website.

Starting_small-259x300If you have an idea for a book like Houston did, you should think about starting a micro business. A Micro Business is a low-cost, low risk, small-scale, business that a teenager can start in a relatively small amount of time. In my book, Starting A Micro Business, I outline the steps required to start a micro business for success! You can check out my book on Amazon in paperback or Kindle edition.

Carol Topp, CPA

Micro Business Idea: Homemade Facial Scrubs

 

Simple Sugars' best-selling almond sugar scrub, Lazzari's favorite. It is available for purchase at http://simplesugars.myshopify.com/. (Photo Courtesy of Simple Sugars' website).

Simple Sugars’ best-selling almond sugar scrub, Lazzari’s favorite. It is available for purchase at http://simplesugars.myshopify.com/. (Photo Courtesy of Simple Sugars’ website).

Simple, natural, and entrepreneurial! Lani Lazzari started making homemade facial scrubs when she was just 11 years old.

The idea started to spark in Lani’s head when she grew tired of seeing her dermatologist for her eczema. Then when her mom was passed over a promotion at her work, Lani decided to make homemade facial scrub Christmas presents, and that’s when her idea really grew!

Because many of the commercial skin care products that Lani tried were harsh on her skin, Lani started researching a way that she could make an all-natural skin care product that would be safe for sensitive skin.

When Lani finished her research, her mom helped her with buying the ingredients and other supplies needed to make the scrubs. After the ingredients were bought, Lani started work in her kitchen. She made her first batch of facial scrubs in a couple of hours, the scents were vanilla and almond.

Then two months later, Valentine’s Day approached her, and Lani decided to start taking orders for her scrubs. “She [Lani] said she thought she could make chocolate and rose,” Gina Lazzari (Lani’s mother) said. “My husband was working at a company and we literally sent out an email the day before Valentine’s Day saying it if you forgot, it is not too late, we can have this delivered to you tomorrow.”

Lani Lazzari. age 19, is the President and CEO of Simple Sugars. The young entrepreneur founded the company when she was only 11 years old. (Photo Courtesy of Lani Lazzari).

Lani Lazzari. age 19, is the President and CEO of Simple Sugars. The young entrepreneur founded the company when she was only 11 years old. (Photo Courtesy of Lani Lazzari).

From that email, Lani received two dozen orders. It was at this point that Lani had to decide if she wanted to continue this as a hobby or make it into a business. Lani decided to make it into a business and Simple Sugar’s was born.

Eight years later, at just 19 years old, her innovation has turned into a multimillion dollar business that has received not only glowing reviews and national prominence, but would culminate in her biggest break on ABC TV’s Shark Tank, spurring a Pittsburgh-raised billionaire to buy a stake in Simple Sugars. Read more of Lani’s story over at PointStarGlobe.com.

Starting_small-259x300If you’re inspired by Lani’s story and want to start a micro business of your own, you should check out my book, Starting A Micro Business. This book offers ideas, a business plan, pitfalls to avoid and resources to get a teenager started making money running their own micro business. Check it out today in paperback, eBook, or Kindle.

Carol Topp, CPA

 

Shark Tank Mark Cuban: Only morons start a business with a loan!

 

I like watching Shark Tank. Do you?
Here’s one of the sharks, Mark Cuban, giving great (and blunt) advice on starting a business.

“If you’re starting a business and you’re taking out a loan, you’re a moron.”

Agree or disagree?

 

Leave your comment below.

 

Carol Topp, CPA

Micro Business Idea: Customizable Accessories for Crutches

 

Aliyah Wilson, St. Louis entrepreneur and founder of Cool Aid Crutch Wear. Photo by Heather Lake

This is a creative idea, St. Louis teen Aliyah Wilson came up with the idea for customizable crutch accessories.

The idea came after she was having four different foot surgeries. Since Aliyah was limited on the types of activities she could do, she came up with CIY (Create It Yourself) crutch accessories. The accessories are made of 100% recycled materials and provide a fun and creative way to express yourself.

Aliyah calls her startup business, Cool Aid Crutch Wear, and provides an easy way to purchase the customized crutch accessories through her website.

After launching her business, Aliyah decided to enter a national entrepreneur contest called, Elevator Pitch Challenge, she entered a video pitch of her product and won the $2,500 prize from E-Trade Bank! Aliyah said she plans on using the money to advance her education. Watch Aliyah’s video pitch below and find out more information about her startup business at her website, Cool Aid Crutch Wear.

H/T: BizJournals

Starting_small-259x300If you’re inspired by Aliyah’s story and want to start a micro business of your own, you should check out my book, Starting A Micro Business. In my book I explain how to setup a Tax ID, Write out a Business Plan, and more! Check it out today in paperbackeBook, or Kindle.

Carol Topp, CPA

Micro Business Idea: Membership Site

Learn how a 5 year old kid started his own membership training site about dinosaurs. At MicroBusinessForTeens.comCute and Smart! Bodhi Shonin Moore is just 5 years old and with the help of his dad, he already has a membership website setup.

Bohdi’s dad, Jason, is an online marketer and business consultant that creates online training products for himself and others. Well according to Jason, Bodhi was inspired by that and asked his dad if he could setup his own video based website.

Jason said, “He kept asking me if he could shoot video and build a business too. So, one day I offered to partner with him as a consultant and service provider and he got really excited.”

Bodhi told his dad, “I want to teach about dinosaurs”. So, they gathered all of his books and encyclopedias on the topic, sat down in front of a white board, and came up with 5 ideas for 1 minute videos that could be uploaded to his website.

Bohdi (pictured) is only 5 years old and he already has his own membership site selling dinosaur informational videos.

Bohdi (pictured) is only 5 years old and he already has his own membership site selling dinosaur informational videos.

“Bodhi worked right alongside me, guiding every step of the set up and design process with his vision of what he wanted it to be and how he wanted it to look.”, his dad said, “And the end result is, Bodhi learned a ton about creating value, building a business online, marketing, and sales and he already has ideas for 3 more projects he wants to launch.”

“I love creating value and building a business – my dad and I did it all by ourselves and its name is DinosaursAreDinomite.com,” stated Bodhi.

Bodhi’s website gives you access to 5 videos about dinosaurs for $5 and he stated that when you purchase his product, he will put a third of the proceeds in savings, a third will go to charity, and a third is for Bodhi to spend or invest.

Starting_small-259x300If you feel inspired by Bodhi’s membership site and feel like you have information that you can offer the world, you should start your own membership site. It isn’t hard to start one, all you need is a domain, web hosting with WordPress, and a plugin (read about choosing a membership plugin). I also recommend that you check out my book, Starting A Micro Business. In my book I explain how to get an idea, write out a business plan, and more! Check it out today in paperback, eBook, or Kindle.

Carol Topp, CPA

Report: 15 percent of US youth out of school, work

 

This is horrible news:

Study: 15 percent of US youth out of school, work

WASHINGTON (AP) — Almost 6 million young people are neither in school nor working, according to a study released Monday.

That’s almost 15 percent of those aged 16 to 24 who have neither desk nor job, according to The Opportunity Nation coalition, which wrote the report.

Other studies have shown that idle young adults are missing out on a window to build skills they will need later in life or use the knowledge they acquired in college. Without those experiences, they are less likely to command higher salaries and more likely to be an economic drain on their communities. Source: http://bigstory.ap.org/article/study-15-percent-us-youth-out-school-work-0

Fortunately, I have a solution: start a micro business

That’s what this website is all about and here’s how to get started:

1. Watch my PBS television show on Youtube

2. Visit my Pinterest page or idea blog posts to get an idea for your micro business

Starting_small-259x300

3. Buy my book Starting a Micro Business and write a business plan

4. Start making money and learning a lot!

5. Email us your story

 

 

I’ve been traveling around the country this year speaking to teachers and youth leaders about teen unemployment and how starting a micro business can help give teenagers the skills they need for life and earn some money to support their family or fund their education.

Next, I’ll be speaking in Cleveland, Ohio on November 16-18 at the Consortium for Entrepreneurship Education Forum. My topic: “No Job? No Problem: Micro Business for Teens.”

Carol Topp