Why is crowdfunding taxable?
Crowdfunding seems like the perfect solution for innovative companies seeking to raise capital to implement their visions while maintaining their independence from big and dominant investors. It’s hip. It’s trendy – and it works. In some cases the crowdfunding is set up as a donation, generally for projects that are not intended to turn a profit. The others forms of crowdfunding reward the investors with either equity in your project, or goods and services, either immediately or in the future when your product develops.
Why is the taxman after my crowdfunding capital?
Only one problem – as far as the tax authorities in most countries are concerned any money you raise through crowdfunding is not considered to be a tax-free loan or donation to your business – it is taxable income.
But I need the capital to jump-start my idea!
Fortunately, there are a number of loopholes and provisions in the American (and other countries) tax code you can use to hold off the taxman. First, ensure that the crowdfunding site establishes you as the agent for the corporate beneficiary of the funding, rather than the actual beneficiary.
Still, the beneficiary is still liable for taxation on all income received. However, if the crowdfunding does not commit itself to providing a tangible return to those donating to the campaign, any funds donated may be considered a gift and the recipient is not liable for taxation on that income – so long as said “gift” is below 15,000$ in value.
Still, this is income that must be reported, and if the crowdfunding campaign is “too successful”, raising more than 15,000 $, or if you offered any tangible gift (even a coffee mug or a key holder) to the donators – then that income is taxable.
However, if the donations are strictly defined as loans that must be paid back in full or the purchase of an equity in your corporate entity then the capital raised by crowdfunding is not considered capital income.
Sounds interesting – but I’m not sure any of these options are right for my business model. Is there any other way out?
There is – expenses, expenses, expenses. If you establish that your crowdfunding campaign is an active business rather than a hobby, then certain expenses incurred in that business can be offset against your tax liability.
Which expenses exactly?
Well, that depends on the type of your business – and the type of your accounting method. Startups can reduce startup costs or apply research and development credit against payroll tax liability instead of income tax liability.
Timing, timing, timing.
Of course, the nature of startups is that they generally incur expenses AFTER raising money and during the development process. Therefore, timing things so that you will incur your expenses in the same financial year as the capital raising campaign is crucial.
Consult a professional!
The time to plan your taxes is before, rather than after you commit yourself and your business to tax liable campaigns. Every business is different, and what you need is an accountant and tax professional who will help you plot out your moves in advance.