Crowd Funding
Crowdfunding
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Crowdfunding
Crowdfunding is used to solicit financial contributions
from a large number of people, referred to as backers,
over the internet. The financial contributions are used
for a wide variety of projects including business ventures,
social causes, and support for individuals with
a special need. By using the internet, projects can gain
access to funds outside of traditional sources such as
banks or capital markets. A number of organizations,
referred to as platforms, have developed to connect
someone seeking funds with those who have an interest
in contributing. The use of crowdfunding has developed
rapidly in the last twenty years with billions of dollars
being raised each year by this method and hundreds of
projects being launched on a daily basis.
Typical Projects
Crowdfunding for creative efforts such as music, gaming,
and movie projects have raised some of the largest
amounts of money. High tech projects are also very common.
Some examples include Pebble E-Paper Watch,
Formlabs 3D Printer, and Oculus Rift. The Tile app for
finding lost items received support from crowdfunding.
The ALS (amyotrophic lateral sclerosis) Ice Bucket challenge
is an example of a recent highly successful campaign
to raise money to battle an incurable disease.
Crowdfunding a Project
Project initiator. The individual or organization, referred
to as a project initiator, seeking to fund a project
determines the funding need and deadline, selects the
platform most suited to the project, and creates a presentation to attract backers.
Crowdfunding
Fees. The platform will typically receive 3% to 5% of the
funds raised. The company holding and paying out the
funds will typically charge 3% to 5% of the funds.
Backer Involvement
Crowdfunding offers potential backers the opportunity to
search for a wide variety of projects that appeal to them.
Backers receive the satisfaction of donating to a project
with a relatively small donation that is easily made.
Rewards or payoff. In addition to the satisfaction of giving,
the backer may receive something in return with no
or very little monetary value up to a stake in the company.
Risks. Backers run the risks of scams and no pay-off from
an investment in a high risk project. Due diligence can be
very difficult to perform. If the funds are released on an
All or Nothing basis, then backers will see a credit card
charge for projects that do not reach their funding goal. If
funds are released on a Keep it All basis, then the backer
must rely on the project initiator to return unused funds.
Tax Issues
Crowdfunding can create a number of tax issues. In
some cases, there is little guidance from the IRS or state
governments on how to treat the transactions.
Tax deductions. Generally, contributions to a crowdfunded
project will not be deductible unless the project
is a qualified charity. Contributions to an individual are
not deductible.
Gift tax. Unless the backer makes a very large gift (over
$15,000 in 2018) or has made other large gifts, a gift tax
return will not be required.
Capital gains/losses. If the backer receives shares in a
company, then a record of the basis of the shares and
date(s) acquired must be kept. A capital gain or loss will
occur when the shares are disposed of or in the event of
a project failure.
Loans. If the backer receives interest from a loan to a
project, then the interest will need to be reported. In the
event of a project failure, the backer may be able to deduct
the loan as a bad debt.
Platform. The platform makes the presentation available
to a large number of backers via the internet and
may provide other services to the project.
Backers and pledges. Interested backers are able to
make pledges using a credit card. The organization serving
as the platform will typically use a company such as
Paypal or Amazon Payments to collect and release the
funds. The release of funds is based on either the All or
Nothing or Keep it All method.
All or Nothing. Funds are released to project and backer
credit cards are charged only if the funding goal is
met by the deadline.
Keep it All. In this case, funds are released to the project
and credit cards are charged when the deadline occurs.
The project initiator decides whether to proceed with
the project with partial funding or return the pledges.
Crowdfunding Platforms
There are hundreds of platforms available to project initiators.
Some of the larger or more well-known platforms
are Kickstarter, Indiegogo, Crowdfunder, Rockethub,
Crowdrise, and appbackr. Due diligence on the part of
the project initiator is necessary to find the platform most
suited to a particular project and avoid scams or other issues.
The focus for these platforms is summarized below:
Platform Project Focus
Kickstarter.................... Creative projects
Indiegogo...................... All types
Crowdfunder................. Investment
RocketHub.................... Creative projects desiring follow-on support
Crowdrise..................... Causes and charities
appbackr...................... Mobile apps
Taxable income. When an individual or nonprofit cause
receives a gift, the income is generally not taxable to the
recipient. Depending on the amount received and the
number of backers, the recipient may receive a Form
1099-K, Payment Card and Third Party Network Transactions,
from the payment vendor. The individual will
need to consider how to inform the IRS that these funds
are a gift and not income. A nonprofit will have to consider
whether to file for exempt status and whether to
file a 990 series tax return.
A business receiving pledges will need to determine if
these pledges are taxable income or nontaxable gifts.
Self-employment tax. A business operating as a sole
proprietorship that has taxable income will owe selfemployment
tax on the income.
Sales tax. A business providing a product to backers
in return for a donation may owe sales tax in the states
where the backers reside. Sales tax rules vary widely from
state to state.
Summary
Crowdfunding is a new, exciting, and successful method
of raising funds for individuals in need, causes with
social value, and business start-ups. Individuals and
causes are able reach a large number of potential donors.
Businesses are able to raise funds outside of more
complex and expensive methods in the traditional banking
and capital markets. Backers can select from a wide
range of projects that they may wish to contribute to.
On the other hand, crowdfunding raises business, legal,
and tax issues where the rules have not been firmly
established. In many cases, the project initiators may
not be fully aware of these issues until after funds have
been raised and tax returns need to be filed.
Contact Us
There are many events that occur during the year that can affect
your tax situation. Preparation of your tax return involves summarizing
transactions and events that occurred during the prior
year. In most situations, treatment is firmly established at the
time the transaction occurs. However, negative tax effects can
be avoided by proper planning. Please contact us in advance
if you have questions about the tax effects of a transaction or
event, including the following:
• Pension or IRA distributions.
• Significant change in income or
deductions.
• Job change.
• Marriage.
• Attainment of age 59½ or 70½.
• Sale or purchase of a business.
• Sale or purchase of a residence
or other real estate.
• Retirement.
• Notice from IRS or other
revenue department.
• Divorce or separation.
• Self-employment.
• Charitable contributions
of property in excess of
$5,000.
