Throughout the COVID-19 Pandemic, individuals and businesses have turned to crowdfunding to support their financial needs. Crowdfunding sites like GoFundMe and Kickstarter have made it accessible for companies to acquire much-needed financial support. Although crowdfunding has grown in popularity, the implications of this funding can be tricky to navigate. To properly understand the implications it can have on your business, it’s important to start at the beginning.
What is it?
Crowdfunding is the process of raising capital through various backers by way of the internet.
Common Crowdfunding Sites
- Kickstarter
- GoFundMe
- Indiegogo
- Fundable
Types of Crowdfunding
- Donor-Based: The most popular type of crowdfunding that involves the donation or receipt of donations without any resources or services exchanged.
- Reward-Based: Involves the exchange of funds in return for goods or services.
- Equity-Based: The exchange of funds in return for an ownership interest in a company.
Tax Implications
- Donor-Based: For the most part, funds received from donors, with no expectation of getting something in return, are not considered income. Under the “something for nothing” rule, the donation is considered a personal gift from the backer. For this reason, the gift would be nontaxable to the receiver, but the gift is restricted to the $15,000 annual gift tax exemption for the donor. Since the donations are usually made to a non-qualified charity, the donation does not qualify for the charitable deduction.
- Reward-Based: Keeping in line with the “something for nothing” rule, any funds received using the reward-based crowdfunding source would be considered taxable income. This is because the contributor is receiving something in return for the funds provided. For example, if a clothing company needs additional funds for a new clothing line, it may offer a “free” T-Shirt in return for any funds received. Since an exchange is taking place, this would be deemed a business transaction and reported as a source of income.
- Equity-Based: Under the Jumpstart Our Business Startups (JOBS) Act of 2012, an exemption was created that allowed non-accredited investors the opportunity to participate in funding campaigns. It is debatable how exchanges using this source of crowdfunding should be taxed based on the specifics of the situation. Hence, it’s critical to reach out to your local CPA for help on how to account for the matter.
In Summary
It’s important to keep in mind that the details provided above are the general rule, and that not all transactions should be treated the same way. Additionally, all records should be preserved to demonstrate when income can be properly excluded from your tax return. If you have any questions about crowdfunding, and their tax implications for your business, please reach out via email, give us a call at (401)-921-2000, or fill out our online contact us form.