Part 2 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.
Just as recipients often wonder if the support they receive is taxable (see Part 1 of this series), givers sometimes wonder about the tax implications of their contributions. The short answer is: there usually aren’t any—so don’t be afraid to give!
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.
In the rare event that giving affects your taxation, what that effect is really depends on what kind of transaction you’re participating in.
In order to determine the type of transaction, ask yourself whether the person or business you are contributing to is offering you any kind of product, service, or perk in exchange for your current contribution.
The answer is no, even if the recipient:
- tells their supporters what they will do with the funds*
- promises to pass the money on to a beneficiary who is not them
- promises to use future profits to benefit a particular cause or charity
- promises to repay the money without interest
* As long as what they intend to do does not involve giving, now or in the future, their 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 they 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
- to repay the money with interest
- control of, or any kind of say in, their business
- a share of their business’ future profits
* If they are just describing what their business will provide in exchange for future funds, once it is up and running, the answer to the important question is still no.
Typically, Gofundme campaigns and solicitations for direct PayPal, Venmo, or Cash App transfers do not offer anything in return; Kickstarter, Indiegogo, Patreon, and Groupon campaigns usually do.
If the Answer is No
The only donations that are deductible from your personal income tax return are those that you make to an eligible entity, most commonly a 510(c)3 non-profit. Most crowdfunding campaigns are not for 501(c)3s, and therefore your contributions are not tax deductible.
Whether or not you declare your charitable donations on your tax return depends on whether you itemize deductions or use the standard deduction. If you do itemize, keep records of your donations—organizations are not required to provide written acknowledgement unless your contribution is $250 or more.
Businesses may not deduct their charitable donations to 501(c)3s or other eligible entities.
If the recipient of your contribution is not a charitable organization, then you are making a personal gift. Gifts are never taxable to the recipient, and they are taxable to the giver only under very specific circumstances that most US taxpayers will never meet.
For IRS purposes a personal gift is money (or goods) that you contribute to another without expectation of anything in return.
This includes loans that do not charge interest.
It also includes covering expenses (except for medical and tuition expenses) for someone, even if they never receive the money directly.
An individual may give up to $15,000 to each recipient in a calendar year without reporting the gift to the IRS. Married couples filing jointly may give up to $30,000 to each recipient in a calendar year without reporting the gift to the IRS.
Payment of a beneficiary’s medical and tuition expenses is exempt. It is best to pay these expense directly, without passing money through the beneficiary.
If you do pass money through the beneficiary for such expenses, be sure that the beneficiary keeps receipts and shares them with you. If you end up having given in excess of what the beneficiary actually spends for these purposes, you may have to report the remainder of the gift to the IRS (if it passes the thresholds stated above).
If you give goods, like a car, instead of money, and are concerned that the value meets the reporting threshold, consult a tax professional for proper valuation.
Passing the reporting threshold does not mean that you will be taxed on your gift.
Each individual taxpayer has a lifetime gift-giving exclusion of $11.4 million as of 2019. You are only taxed on gifts once you have exhausted your lifetime exclusion.
Reportable gifts count against that exclusion. So, if you give reportable gifts totaling $100,000 in this year, you can still give $100,000 in reportable gifts each year for another 113 years before your gifts will be taxed.
Your lifetime exclusion includes the disposition of your estate when you die.
Don’t be afraid to give! Most taxpayers will never exhaust their lifetime exclusion. If you are concerned, consult an estate planning professional.
Giving Gifts as a Business
Businesses (and individuals who report business income) may deduct $25 of each gift given. The gifts must serve a business purpose, such as building a relationship, promoting the business, etc.
If the Answer is Yes
If your recipient is offering you a product, service, or perk in exchange for your contribution, then you are making either a purchase or a loan (if the perk is repayment with interest), or you are buying equity in their business (if the perk is a say in their business or a portion of future profits.
If you are a business, you may be able to deduct purchases as business expenses. You must be able to justify the expense as a business expense. Consult a tax professional if you are unsure.
This option is not available to individuals who do not report business income.
You may choose to lend money rather than giving it. Any interest that you receive on the loan is considered income and is taxable.
If you do not charge interest, the IRS considers the transaction a gift, not a loan.
There are ways to leverage your retirement funds to support your community. Next Egg has resources to help you.
Contributing money in exchange for a stake or say in a business, or a portion of future profits, is buying equity in the business. This is a legitimate form of support, and it has complex tax implications for both the supporter and the recipient. Consult a tax professional.
And be sure that buying equity is what you intend to do. Some Kickstarter or Indiegogo campaigns may include language that imply an exchange of equity. It is the responsibility of the requester to ensure that that is their intention and to be prepared to follow through. However, if you spot such language and are unsure of the requester’s actual intent, be an ally and ask.
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