Explain: Do You Have to Pay Income Tax on Crowdfunded Money?

Introduction

It has always been common practise to turn to friends and family for financial support in times of crisis, but the advent of the internet has given this age-old practise a fresh new twist. Now, with the help of apps and websites like GoFundMe, Kickstarter, GiveForward, and Crowdfunder, you can easily raise money to donate to good causes. Over the course of its history, GoFundMe has purportedly attracted more than 50 million donors who have contributed more than $5 billion. The Internal Revenue Service (IRS) naturally becomes interested in financial transactions, thus the question arises: Will you be required to pay taxes on this incoming wealth? If someone gives you money out of the kindness of their heart, it's different than if you earn it by performing some service for them.

Things You Should Know About Crowdfunding and Taxes

What you need to know to avoid issues with the IRS and other tax authorities is below.

• Crowdfunding Proceeds Are Taxable Income

Generally, crowdfunding proceeds are taxable as income in the year they are received or the year they become constructively available to you, whichever is later. Income should be reported as soon as possible when it is earned, when it is due to you, or when you receive it if you are using the accrual basis. There is no way to delay the recognition of income using the accrual approach.

• You May Owe State Sales Tax And Income Tax.

There may be a requirement to remit sales tax on crowdfunding funds received from customers in states where the business collects and remits payments. Income tax is the same way. If you want to be sure, you should contact the state.

• You Can Deduct Expenses From Your Income.

If you utilise crowdfunding to support your business, you must still file your taxes like any other company. Earnings are reported, and then those earnings are reduced by expenses. If you successfully fundraise the total amount you anticipate spending on product development, and then spend exactly that amount, your business' net income should be close to zero. If the costs of running your company are more than the money you bring in, you may be entitled to a tax write-off.

You May Be Able To Deduct Start-Up Expenses In The Year You Paid Them

Business creation research costs and actual start-up costs are not normally deductible in the same year they are incurred. While the IRS allows you to deduct up to $5,000 in the year your firm opens, most of these costs will be capitalised and amortised over 180 months. The amount by which your total start-up costs exceed $50,000 will reduce that $5,000. Taxes, interest, and R&D expenses are examples of additional outlays that aren't considered start-up costs.

Research And Development Costs Merit Special Tax Treatment

To develop or improve a product, you will likely incur costs associated with research and experimentation. Research and development expenses can be deducted immediately or amortised over 10 years. Market research and advertisements are not included in the budget for research and experimentation. As an alternative, they account for everything that goes into creating a new product, from the first idea through any patents or prototypes.

How Does the IRS Treat Crowdfunding?

In 2016, with the release of Information Letter 2016-0036, the IRS finally began to address crowdfunding. This letter does not make any new rules for the treatment of crowdfunded funds, but it does highlight key considerations that may assist donors assess if their contributions qualify for a different tax deduction (IRC). Everything hinges on how those IRC regulations are interpreted. The letter's key point is that contributors only have to report their gifts as income if they receive goods or services in return. If you are a private citizen and not a business, your gifts are not subject to taxation.

Conclusion

Sites that facilitate crowdfunding often only pay the account creator or a third party acting on their behalf, rather than the intended recipient of the cash. In some cases, a Form 1099-K may be sent to the crowdfunding organiser. If that happens, it could be a good idea to talk to a tax expert. It's possible that you could avoid paying any taxes at all by claiming an "agency" relationship. The recipients (not the organisers) of crowdfunding funds must be ready to provide evidence of the value provided in exchange for the monies raised.

Campaign finance records can be used as evidence in most cases. Crowdfunding proceeds may or may not be taxable, depending on the specifics of the campaign and the donor's situation. Except in rare cases when they are specifically excluded by federal income tax law, crowdfunding proceeds are normally considered taxable income.