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Crowdfunding and Taxes

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If you are raising money via crowdfunding, do you need to pay taxes? The tricky question is how do you define income from a crowdfunding campaign? You might try to define income as a donation in order to avoid paying taxes. Unfortunately, I don't think this works.
Any money derived from an investment effort leading to the delivery of a commercial product is typically taxable, since Federal and State entities see this revenue as ‘income.’ As a result, any ‘project’ in this category is going to be levied at prevailing tax rates, whether it is offered as art, technology, or manufactured goods. No matter you want to manufacture a bike, make a movie, or create a video game, you need to pay taxes. The only exception is Non-Profit (NP) or Non-Government Organization (NGO), and you need to get recognition from the IRS for these.
Of course, taxes are based on income. The cost of reward fulfillment can be considered an expense. My suggestion is to recognize the cost of reward fulfillment early in your campaign. Your tax liability will be lower as a result. Keep in mind that online funding raise is a gray area; you may not be able to provide all expense and income receipts as a normal company would. I suggest you ask a friend who is a CPA to help you recognize as much of the cost of the crowdfunding campaign as possible. 
Below is an interview with a woman who has already done crowdfunding:1
Q: Are the donations tax-free income?”
“A: This is a good question mostly because of the way it’s worded.”
“The answer: no. all the money I’m making on CD and LP (and book, and everything) sales via Kickstarter is taxable.”
“These aren't DONATIONS. That drives me crazy. the way we generally define ‘donating’ is that you are giving something without any return: it’s a selfless, one-way gift to a cause. This is not that. Every single person who’s backed the Kickstarter is getting a product or a service (like a show) that they’ve paid for.”
“It’s more of a 'pre-order' than a 'fundraiser.' The language here gets important. It makes me cringe to read in the press that people have “donated $600k to Amanda Palmer’s Kickstarter (campaign).” That makes it seem like I’m getting away like a bandit. As you can see above have to PAY for and manufacture (and pay the staff to help me create) all the products that are for sale.”

1 Resource: Rick Calton, Taxes and Crowd funding: Paying The Government To Dream?, Crowd funding News, Sep 17, 2013, http://www.crowdfundingguide.com/taxes-and-crowdfunding-paying-the-government-to-dream/
Post by:
Ziqi Chen, Master of Science in Finance, August, 2014
Johns Hopkins University Carey Business School 
NCS Intern, Summer 2014
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