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
For more
information, visit:
http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Required-Filings-2
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
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