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 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.
Crowd funding income can be treated as the following:
- A donation to a 501c3 tax exempt charity.
- Investment in a business by an investor seeking a share of ownership (called equity owners)
- 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.
- 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:
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