Part 1 of a two-part series.
As covid-19 has shuttered or slowed businesses and the uprising for human rights in the wake of George Floyd’s murder has prompted an outpouring of mutual aid in cities across the US, many people are using crowdfunding who have never used it before.
Recipients often wonder if the support they receive is taxable. The answer depends on what kind of transaction you’re participating in.
Before we go any further, please consider supporting the Du Nord Recovery Fund, which will ensure that POC-owned businesses on Lake Street in Minneapolis will be rebuilt.
Now, on to the tax implications of crowdfunding. The main question you should ask yourself is: Am I offering anything in return for the contributions I receive?
The answer is no, even if you:
- promise to repay the money, regardless of interest
- tell your supporters what you will do with the funds*
- promise to pass the money on to a beneficiary who is not you
- promise to use future profits to benefit a particular cause or charity
* As long as what you intend to do does not involve giving, now or in the future, your supporters any kind of product, service, or perk in exchange for this contribution; in that case, the answer is yes.
The answer is yes if you are offering:
- a product, service, or perk right now
- a product, service, or perk in the future, in exchange for this contribution*
- a gift certificate
- control of, or any kind of say in, your business
- a share of your business’ future profits
* If you are just describing what your business will provide in exchange for future funds, once it is up and running, the answer to the important question is still no.
If the answer is no, don’t worry.
You are not receiving income. You are receiving gifts, or maybe loans or donations. None of those are taxable.
Gifts are the most common transaction in emergency crowdfunding, so let’s start with those.
Does it matter if I’m raising money for myself or for someone else?
No. Gifts are never taxable for recipients, and they are only taxable for givers under circumstances that most givers will never meet.
Plus, if all you are doing is fundraising to pass the money on to someone else, you are not considered giver and will not be subject to reporting or taxation.
If gifts aren’t taxable, why is Gofundme (or PayPal, or Venmo, or Cash App) is still asking me to fill out a tax form?
It’s still ok. That’s a form W9, and all it does is give the platform the information they’ll need to report your receipts to the IRS if you pass certain limits.
If you are raising money for yourself, fill out the W9 with your own information. If you are raising money for someone else, fill out the W9 with their information.
Reporting to the IRS? Won’t I have to pay taxes?
It’s still ok. Your proceeds will be reported on a 1099-K at the end of the year if you receive $20,000 or more from 200 or more supporters on any one platform. Reporting is required, but it does not indicate taxability.
Sit back and enjoy your fundraising success.
And then explain that money to the IRS up front, rather than wait for them to ask questions. Here’s how you do it: report* the amount(s) on your 1099-Ks as income, and on the next line report the amount as negative, explaining that the funds were gifts.
* Individuals will do this on Form 1040, Schedule 1, Line 8. Consult a tax professional for help. Where businesses report this will vary depending on how they are incorporated. Consult a tax professional for help.
Any other tips for avoiding trouble with the IRS?
Do not give or promise your supporters anything in return for their current contribution.
Use the words “gifts” or “donations” on your fundraising page.
Clearly identify the beneficiary of the campaign on your fundraising page.
Keep receipts for how you use the funds:
Especially if you use them for your business.
Especially if you use them for medical expenses or tuition for yourself or your dependents.
Gofundme, PayPal, Venmo, and Cash App are the most common platforms for receiving personal gifts online in the United States.
If you are using Kickstarter, Indiegogo, Patreon, of Groupon, you are probably offering something in return for your contributors’ support.
If you promise to pay your supporters back, then you are receiving a loan. It is not income, and it is not taxable.
As an individual, you don’t really need to do any special accounting for this. Just make sure to record all of your payments to your lender, and make sure you stay on the same page with them about what you still owe.
If you raise the funds as an individual but use them for your business, you should account for the loan as an increase in your business’ cash assets and as a liability that your business owes to the lender. If you are unsure how to do this, I have two posts that may help. Consult a bookkeeper for further help.
You will report the summary effects of the loan on your balance sheet on your business tax return. Consult a tax professional for help.
Charitable donations are the contributions that people make to registered non-profit organizations with no expectation of any kind of reward in exchange. They are not taxable to anyone.
Consult a specialist in non-profit incorporation if you would like to form a charitable organization.
What if the answer is yes?
If you answered “yes” to the question Am I offering anything in return for the contributions I receive? then you are probably* receiving income, and it will be taxable, either now or in the future.
* Unless what you are offering is control of or any kind of say in your business. Then you are offering equity, which is a different thing.
If you are offering your supporters any kind of product, service, or perk in exchange for their current contribution, then they are making a purchase from you.
This includes gift certificates issued offline, as well as online campaigns through platforms like Kickstarter, Indiegogo, Patreon, and Groupon.
The income you receive from these transactions will be taxable*—but not immediately.
In brief, the funds you receive are not taxable until your provide the promised product, service, or perk. Until then, you will consider the funds received to be unearned income—a liability that you owe to your supporters. It only becomes real, taxable income once you’ve delivered your half of the deal.
The bookkeeping is important here, so consult a professional if you need help tracking the transactions.
* Unless you are a non-profit organization, and you should still account for this income separately from donations.
In some cases, what you offer in exchange for support may be (partial) control of or some kind of say in your business, or a portion of future profits. In that case, you are offering equity to your supporters.
The tax and legal implications of offering equity are complex for you, your business, and your supporters. If offering equity is not what you intend to do, then change the language in your campaign!
If offering equity is what you intend to do, great! Just be sure to consult a tax professional and possibly an attorney specializing in business registration and choice of entity for advice on your specific situation.
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