There’s an ongoing debate about exactly how money raised on crowdfunding sites such as Kickstarter and Indiegogo will be taxed. It’s not so serious that the IRS needs to step in with guidance, but it is big enough a topic and prominent tax law experts have stepped in to offer their own two cents.
The whole thing began with an analysis of a Kickstarter crowdfunding campaign posted on the Tax Foundation By Scott Eastman.
The campaign was Zack Brown’s potato salad, who started the campaign as a sort of joke with a $10 goal for making potato salad. The more than 5,000 pledges quickly pushed the campaign up past $70,000.
Eastman’s calculations of the federal income tax, payroll tax and state and local taxes pegged Brown’s tax liability at around $21,000. The post was widely picked up and Zack Brown’s potato salad campaign and his potential tax bill even ended up on TIME.
Then Kickstarter brought down the pledged amount to about $48,000 because a lot of it were apparently fake pledges. Leaving that aside, let’s focus on the main issue – What is the tax treatment for funds raised on Kickstarter and other crowdfunding sites?
Kickstarter provides the following guidelines, while noting that they are not giving tax advice.
“In general, in the US, funds raised on Kickstarter are considered income. In general, a creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes. If a creator receives funding in one year and spends money on their project in a later year, consider whether their expenses can still offset their Kickstarter funding using the accrual method of accounting.”
Of course, not all funds raised on Kickstarter need be considered income. Some of it may be a non-taxable gift, depending on the type of campaign and what (if anything) has been promised by the creator to backers in return for their pledges.
The question that is being debated now is whether the money raised by Brown’s potato salad kind of campaign qualifies as income or a non-taxable gift. Backers who pledge $1 will get a thank you and have their name read aloud when Brown is making the potato salad.
Others pledging higher amounts get more swag (a photo, bite of the salad, chance to in Brown’s kitchen, hat, t-shirt, etc,). A lot of this could easily be ignored to make it a gift. He’s not actually selling anything to anyone through Kickstarter, and whatever the backers are getting doesn’t have value commensurate to the amount they paid.
Eastman, however, classifies it all as income. Forbes’ Kelly Phillips Erb says she’s not so sure, noting that intent and value have a crucial role to play here.
Bottomline – don’t depend on Kickstarter or anyone else to decide whether the money you raise is income or a gift. Let your accountant take a look at it and decide how each pledge should be classified and taxed.
Photo credit – Kickstarter.com