Crowdfunding and Taxes: Legal Tips and Tricks
Getting a business venture started or making a product via a crowdfunding project can be exciting. Seeing supporters, or backers, putting their money into your project can be uplifting. Just don't forget about the IRS.
Many people who get funded often wonder whether the money received from crowdfunding is taxable. Despite the lack of specific guidance from the IRS, the answer is yes, crowdfunded monies are taxable income for the year that they are received, with limited exception. Fortunately, there are a few things that crowdfunding startups, individuals and businesses can do to maybe save a few bucks and avoid tax troubles.
To Inc. or Not to Inc.
Depending on your project, you may want to actually form a real business entity. If you are going to be making and distributing a product in large volume, there could be potential liabilities that make having a separate business entity preferable. Speaking to a qualified business attorney about the pros and cons of entity formation before you start your project is just smart business, and could even save you a few dollars come tax time.
Get Professional Financial Help Before Tax Time
Seriously. If you aren't sure about what you're doing when it comes to taxes, get professional help. Crafting a plan for business spending and budgeting with a qualified business attorney or tax professional will help you during the year to know how you can spend money to minimize tax liabilities. Basically, the attorney or professional can tell you with certainty what is or isn't deductible, and up to what amounts, since this will vary depending on your business, and business structure.
End the Campaign in Q1
At a bare minimum, if you aren't going to see a business or tax attorney before you start your crowdfunding campaign, make sure you end your campaign early in the year. Because crowdfunded monies will be considered income in the year they were received, if you receive the monies in December, you will have to spend it before the end of the year to be able to claim deductions on it in that year's taxes. If you end in January, you will have the entire year to spend on deductible business expenditures.
The Gift Trap
Be wary of claiming that crowd-sourced funds are gifts. While some sites may categorize contributions as donations, if your backers are receiving something in return, you should tread even more carefully. If you plan on asserting that the contributions were nontaxable gifts, then with the money you're saving on taxes, hire a tax professional because this is complicated and can lead to quite a bit of legal exposure.
Related Resources:
- Need help with your taxes? Get your tax issue reviewed by an attorney for free (Consumer Injury)
- Top 7 Crowdfunding Tips for Small Business (FindLaw's Free Enterprise)
- Fundraising Laws Entrepreneurs Should Know (FindLaw's Free Enterprise)
- Crowdsourcing Your Invention? 3 Legal Tips That Can Pay Off (FindLaw's Free Enterprise)