Crowdfunding sales exceeded five billion dollars in 2013 and have only increased since then. It’s quickly become a viable option for newbie entrepreneurs and experienced businesspeople alike looking for investment in their ideas.
Yet one thing most recipients of crowdfunded earnings fail to remember to consider is the inevitable involvement of the tax man. Indeed, anytime money changes hands in the United States, the IRS is bound to find out and want their cut.
Crowdfunding is no exception. While it remains a gray area today, crowdfunding is at some point going to be a highly regulated component of business tax.
If you’re confused about how your crowdfunded income will be taxed, or how to properly manage the tax burden of a business with a strong crowdfunding component, pay attention to the following information. It’s going to save you a lot of headaches to worry about it sooner rather than later.
Gift or Sales?
Right off the bat we can find out whether or not crowdfunding will be taxed by determining whether or not the funds count as gifts or sales. Many entrepreneurs who receive crowdfunding are quick to conclude their money is a gift.
This may be true if none of the financial backers are being promised any kind of return on their investment. However if your crowdfunding arrangement promises a product or service in exchange for the initial funds, then the transaction will be classified as a sale by the IRS and will be subject to sales tax and income tax.
The 1099-K form was first provided by the IRS in 2012 to better monitor online transactions, crowdfunding included. Paypal and other entities handling the money transfers are required to send members the 1099-K form if their transactions exceed 200 in number and $20,000 in value. Anyone receiving amounts less than those numbers through crowdfunding will have to fill out their own 1099-K form. It’s a good idea for first-time crowdfunding recipients to find a CPA in your area who can help ensure you’re reporting accurately.
Many times the funds received for a product came through during the year prior to the product being delivered – causing headaches due to the split-up between two taxable chunks of time. Many advisors suggest adopting a fiscal calendar if your crowdfunded business tends to get its earnings towards the end of the year. Another option would be to perform what is known as accrual accounting. However once again it’s important to get the advice of a certified public accountant before going forward with untried tax strategies.
Many crowdfunding-based entrepreneurs continue to roll the dice regarding taxes – doing everything they can to have the money count as gifts while at the same time doing everything they can to attract investors in the first place – usually by promising some kind of a return. Truth be told is we can’t have it both ways. When it comes to Uncle Sam wanting his cut of the action, the consistently intelligent choice is to play it safe. Be honest, fill out the right forms, file on time, and pay your share. Being straightforward with the IRS is the best way to keep tax woes off the cork board and staying focused on how to run your business successfully.
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