Skip to main content

Nonprofit Crowdfunding and Tax Benefits

Starting a nonprofit crowdfunding campaign is neither easy nor simple despite the positive social motivation of the typical campaigner. The reason for this is that the process of creating a nonprofit is complicated, due to the benefits they receive from the government. One of the most useful assistance the U.S. government provides is support to social benefit organizations via an exemption or tax deduction for contributions. Since normal successful crowdfunding campaigns usually spend around 30% of their revenue paying taxes (or they should anyway), this tax advantage will generate huge financial benefit for those who are not subject to taxes. However receiving this huge benefit requires official approval from the US government.
Crowdunding is a new method of raising money and IRS has not yet announced guidelines regarding tax procedures for campaigns. Campaigns created through crowdfunding platforms are usually subject to taxes, except for those organizations who have tax exempt status. Formal recognition from the government is crucial, however. The United States has established several categories for nonprofit organizations, classified depending on organizational characteristics.
Legal charitable organizations that meet requirements of Internal Revenue Code section 501(c)(3) are exempt from federal income tax as charitable organizations. While providing the most effective and extensive benefits, this category has strict requirements. You may check your eligibility and get the detailed requirements from the IRS website:
Other organizations or individuals who do not fall in to this category can be considered tax-exempt as a social welfare organization, as described in Internal Revenue Code (IRC) section 501(c)(4). To be eligible, an organization must prove that it was not organized for profit and must be operated exclusively to promote social welfare. The earnings of a section 501(c)(4) organization must not benefit any private shareholder or individual. Although exempt from income taxation, some are required to report to IRS:
  • Annual exempt organization return
  • Unrelated business income tax return (if an organization has unrelated business income)
  • Employment taxes and others
There are more categories for nonprofit organization. You may visit: http://www.irs.gov/Charities-&-Non-Profits
If you are planning to start a nonprofit project, be sure to let the government know that you are working for a “good thing”. Without your official recognition, you will be subject to taxation.
One more important fact is that some crowdfunding platforms do not allow nonprofit projects. Some that do allow nonprofit projects may take charge as much as 7%. Thus, researching crowdfunding platforms should be one of your first steps when planning a crowdfunding project.  

Post by:
Hanna Kim, University at Buffalo, The State University of New York, May 2015. Bachelor of Science in Accounting.

NCS Intern, Summer 2014

Edited by William Michael Cunningham

Comments

Popular posts from this blog

Crowdfunding heads to Georgetown

So first Fundrise raises $31Million for real estate crowdfunding.  Now Realty Mogul, a real estate crowdfunding platform, responds quickly with a rare opportunity to be a part of a $31.8 million project in the exclusive Georgetown neighborhood of Washington DC. #crowdfundrealestate Realty Mogul, along with   JOSS Realty Partners ( "JOSS" ) , is introducing the Georgetown Plaza to the crowdfunding world. This 150,097 square foot   Class B office building is  located on Wisconsin Avenue, Washington DC's major north-south artery and half a mile north of Georgetown University's main campus and Georgetown University Hospital. The primary objective of this investment crowdfunding campaign is to acquire, lease-up, and reposition the office building before reselling. In this crowdfunding transaction, Realty Mogul investors will hold a partnership equity stake in Realty Mogul 19, LLC.   Realty Mogul 19, LLC will subsequently invest in 2233 Wisconsin NY Member L

Crowdfunding Accounting 101 - Revenue Recognition in Crowdfunding

A start-up using crowd funding to create a product is different from a normal company. The start-up has cash inflows from donations but does not have a product, yet. In this situation, we recommend using completed-contract method to recognize revenue. Under this way of thinking, we assume the start-up is akin to a project or a long-term contract. The crowdfunding company will find it difficult to estimate the revenue from crowdfunders and, hence, the cost of rewards or perks. Under International Financial Reporting Standards (IFRS) and GAAP guidelines, if the firm cannot reliably measure the outcome of the project, revenue should be recognized based on contract costs. These costs should be expensed when incurred. Profit is recognized only at the completion of the project. In summary, for crowdfunding companies, revenue, expense, and profit are recognized only when the crowdfunded product is actually manufactured. 1 For example, assume that AAA Corp. wants to manufacture bicyc

Why we are so optimistic about crowdfunding for minorities

Dr. Mark Dean - On the IBM team that developed PC : "Mark E. Dean (born March 2, 1957) is an African American inventor and a computer engineer. He led the team that developed the ISA bus, and he led the design team responsible for creating the first one-gigahertz computer processor chip. Dean has also helped in the early development of the computer keyboard. He holds three of IBM's original nine PC patents." Jesse Russell , recognized father of digital cellular technology: "Jesse Eugene Russell (b April 26, 1948) is an African-American inventor and one of the visionaries’ whose innovative perspectives profoundly influenced the wireless communications industry, (a) driver of growth in the 21st century. Trained as an electrical engineer at Tennessee State University and Stanford University , and recognized globally as a thought-leader, technology expert and inventor in the field of wireless communication for over 20 years.." Emmitt McHenry , Founder of Ne