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Tax Implications of Crowdfunding

Crowdfunding-300x178Sometimes we have great ideas that we believe could be profitable business ventures. But when it comes down to it we simply don’t think we could manage the capital needed to start the business. That is where companies like Kickstarter and other crowdfunding ventures come into play. By describing your business idea, and offering premier access to the goods, you can accumulate hundreds of small donations to your idea, instead of pitching a few big investors. But when you have thousands of dollars rolling in, what are the tax consequences?

 

Is Crowdfunding Money Income or a Gift?

The answer to this question makes all the difference. If 100 people give you $100 gifts each, then you will have $10,000 in gifts. If they give you the same amount and it is considered taxable income, then you have to add $10,000 onto your taxes. The bottom line is that each are taxed differently, and there is really no set answer at this point.

Taxable Income

Taxable income is defined by the IRS as income (monetary or otherwise) that is not offset by a liability. That last part is the key: not offset by a liability.

When you start a crowdfunding campaign, the purpose of the money coming in is to run your business. You need office space, work space, equipment, supplies and likely personnel. Those costs add up quickly, and if you did your research then you know the exact amount needed. Those costs are also business expenses and they are tax deductible.

So let’s suppose you get $10,000 from your crowdfunding venture, and you use $10,000 to buy equipment etc. Then your tax implication is nothing because you deducted it all. At this point it doesn’t matter (as much) if it is a gift or taxable income.

Keep in mind, however, that some of the crowdfunding money goes toward your salary. You still have to pay taxes on your salary.

Receiving Gifts

If your crowdfunding monies are considered gifts, there are entirely different consequences. Gift taxes may come into play (although there is an exclusion that everyone gets), and keep in mind that gift taxes are almost always the responsibility of the gift-giver.

Suppose you have $10,000 in expenses. Your net money, if it is all taxable, would be $0 after all is said and done. However, if it is in the form of gifts, and you don’t have to worry about the taxes, your net money is actually negative $10,000.

Practical Taxes Can Help You Sort Things Out

Practical Taxes can not only help you figure out the tax implications of your crowdfunding venture, but we can also help you figure out the best business model and get things registered with the city and the state. Starting a business is not something to take lightly, so hiring an accountant in Billings, Montana is a smart first move.

Practical Taxes is a full service accounting firm in Billings, Montana. We provide all sorts of services over and above tax preparation. From business planning to online payroll services, we are your source for expert guidance.