Although the
primary purpose of crowdfunding is to help project starters raise money from the crowd, it often provides its own funding
procedures. For example, Kickstarter uses an “All or Nothing”
method which allows project starters to receive the funds raised only
if the crowdfunding campaign reaches it's goal. On the other hand, GoFundMe allows crowdfunding project sponsors to choose between receiving money only once they reach the goal
amount or receiving every single contribution from every single backer.
Choosing the right platform depends on the characteristic of the
project, but people should aware of the tax issues that come with each
method.
An "All or Nothing" (AON) strategy is the most frequently used in crowdfunding. This requires project starters set a funding goal prior to launching. They will be able to receive money only if they
can confirm the success of the project. After this confirmation, the
raised money is transferred to the project creator's bank account, with a fee deducted by the platform. At this point the money is in their
pocket, which means the official transfer of money occurred from hand
to hand. The project starters are now subject to income tax.
Regardless of the project’s intent, unless they officially
claimed status as a non-profit or they are an official
non-profit organization, crowdfunding project revenue must be reported by the end of the financial year.
Differing from
“All or Nothing”, "Take What You Can Get" (TWYCG) projects get every single contribution from the project backers. The funds are transferred as donations are made directly to the project
creator’s bank account. Receiving every single contribution may sound great for those who
are deeply concerning about the success of project.
However, project
starters must be aware of the money they have received. Since they
are allowed to take any and all money given, project starters have to report this income to the
government, even though they failed to reach their goal. Don’t forget FEDERAL income tax itself varies from 15%
to 35% and will apply to every person.
For example, assume, at
the end of December 2014, you are planning to start your crowdfunding project. You are aiming for the Christmas season so your project has to happen during the holiday season. You campaign will run from December 15th to January 15th. If you decide to
receive every single contribution (TWYCG) instead of All or Nothing (AON), you will
be subject to taxes for both 2014 and 2015 year because the funds raised will be received in January 2015, and must be added to donations earned in 2014. This is not an issue with AON, since funds will not be received until January, 2015.
People who are
planning to start crowdfunding should carefully analyze their project
strategy with an eye to possible tax issues and consider taxes a major part of project expenses when creating a crowdfunding financial
plan. Don’t forget - choosing a funding method may benefit or
harm your entire project.Post by:
Hanna Kim, University at Buffalo, The State University of New York, May 2015
Bachelor of Science in Accounting
Edited by William Michael Cunningham
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