While crowdfunding is becoming more and more common, tax support and guidance for the campaign creators continue to remain unclear on many points. At a minimum, the tax treatment of funds generated through crowdfunding depends on whether the campaign is reward-based, donation-based, or equity-based. Moreover, if it is reward-based, the value of any reward offered also becomes a factor, especially when the value of the reward, such as product naming rights, is difficult to determine.
Pledges received from donation-based crowdfunding are likely to be considered as nontaxable gifts while equity-based crowdfunding is more likely to be considered paid-in capital. Neither of which are generally subject to income tax. However, it should be noted that the money you raise through contributions from backers for reward-based campaigns are considered revenue for the business by the IRS and are subject to income taxes. Also, the money raised may be subjected to state excise, sales, and/or business and occupation tax in some states. Therefore, you must track all your campaign expenses carefully to reduce your tax burden, just as you would with any business.
Moreover, if the campaign raises money in one tax year and incurs some or all of the expense of fulfilling the campaign’s rewards in the subsequent tax year, the company may experience tax-induced cash flow issues. As a result, it is always a good idea to consult your CPA to discuss your tax related issues prior to undertaking any crowdfunding campaign.
How will income taxes affect your crowdfunding campaign?
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