Crowdfunding and Kickstarter campaigns have become very popular over the last few years for entrepreneurs, inventors, individuals, and companies to raise funds to support their endeavors. If you are new to crowdfunding, an entrepreneur will ask for money via an online platform and anyone throughout the world can donate money for their cause. While the IRS has not provided much guidance on funds raised from crowdfunding and Kickstarter campaigns there can be tax ramifications from funds received.
In a typical crowdfunding endeavor an entrepreneur typically asks for donations and depending on the size of the donation the donor may receive something in return such as a free hat, T-shirt, or tickets to an event. In some cases, money may be donated with nothing in return other than the pure satisfaction of helping someone out. In some situations the donor may be donating funds in exchange for equity in a company or they will be paid back the donation amount plus interest. Each of these scenarios carries different tax consequences. In this blog post we will go through each of the listed scenarios and the various tax implications to the donee.
1. Funds in exchange for a hat, T-shirt, tickets to an event etc.:
Under IRS Code Section 61(a), “except as otherwise provided by law, gross income includes all income from whatever source derived.” In this case money received from crowdfunding would be taxable to the donee who received the money whether or not they provided gifts in exchange for said donation. However, any gifts provided that would be considered an ordinary and necessary expense (in this case they would be, because you may not have received the donation had a gift not been offered) can be deducted from the fundraising income received. Keep in mind while the gross income is reportable the donee will most likely have ordinary and necessary expenses that can be deducted against gross income.
2. Funds in exchange for “pure satisfaction”:
Just like in the scenario above the gross proceeds are reportable as income. However, as mentioned before the donee will most likely have ordinary and necessary expenses that can be deducted against gross income.
3. Funds in exchange for equity:
Just like you see on Shark Tank, in order to entice an investor you may have to give up some equity in your company. In these scenarios these contributions are considered capital contributions and are not included gross income and therefore not taxable.
4. Donations paid back with interest:
In some cases an individual or a company is unable to obtain a loan from a bank, so they offer a crowdfunding solution that will pay back the investor their initial investment plus interest. This is considered a loan that must be repaid and the interest from these loans are deductible as interest expense to the donee and interest income to the donor.
The tax consequences of Crowdfunding and Kickstarter campaigns all depend on the various circumstances and situations. If you are thinking about starting or donating to a Crowdfunding or Kickstarter campaign be sure to consult the experts at CAPATA.
– Jeff Trapp
Tax Manager at CAPATA