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Tax implications: Are the Kickstarter funds taxable? Deductible? (2018)

Not sure if you need to pay tax as a new Kickstarter project creator?

This article will solve all your question.

We all know what crowdfunding platform is and how it helps small businesses, startup, or individual creators like me and you to raise funds so that to make their creative work possible. Over years, there are a number of successful crowdfunding sites such as Kickstarter, Indiegogo, Patreon, GoFundMe and the list goes on. Out of those, one the most well-known sites that help to fuel up your next big idea is no other than Kickstarter. Founded in 2009, It covers so many sectors and categories which including technology, music, games, art, film, and food & craft, making it a favorite to many.

As for crowdfunding money, whether you should pay tax for the money you raised is always the talk in the grey zone. The tax implications greatly depend on your country and state law. Also, there may be other taxes that you need to pay beside of income tax — sales tax for example.

In the US, Internal Revenue Service (IRS) did not make a clear statement on crowdfunding money and whether it’s taxable income or a “gift”.

But that doesn’t stop your movement creating your awesome project, right?

Therefore…

What should you know about tax implications before launching a campaign?

If you are not already a business owner, these are the few tax issues you will need to deal with before you start everything.

Before you launch your Kickstarter campaign, do remember to consider that tax expenses can eat up a big margin of your raised fund and can do some serious impact on your total revenue. If you are not certain, a good rule of thumb is to add 20% to the total number of money raised so that to cover all the tax-related expenses. Talk to your accountant/tax attorney and have a separate business account from your personal. This way, all the in-and-out money are much clearer to track and you will be saved from the accounting disaster.

Finally, keep track of everything from receipt to invoice for the project. A professional and more systematic cooperate planning will not only make your contributors trust you to see the exact money-flow but also help you with the IRS audit later for tax deductions (if any). We will talk about tax deduction in detail.

So, to get your mind clear, let’s move on.

So before/after launching a fundraising campaign, I am sure there will be two questions pop-up in your mind:

Are crowdfunding funds taxable?
The short answer is yes. Crowdfunding’s funds are generally taxable. 

While considering the situation where it should be classified as a donation, gift or business income, the result may vary from case to case. For most of the Kickstarter campaign, backers do expect a product in return, it is, therefore, a taxable income. “In general, in the US, funds raised on Kickstarter are considered income.” stated by Kickstarter, Read more. For the requirement to consider as a non-taxable gift, it can be either one of the following criteria:

  • Selling equity of your business via crowdfunding (which is technically illegal in the USA).
  • Taking the money as a loan that has to be paid back.
  • The donors sending money without expecting something in return or in official terms “a gift that was given out of detached and disinterested generosity”.

Is so, is that deductible?
Yes and no. It can be deductible under some conditions. The question is somewhat controversial as the Kickstarter, Public-benefit corporation (PBC), is not classified as charity organization with 501(c)(3) tax-exempt status. 

However, the grey part is whether if you spend all or part of the money on your project on the same tax year, or later years. If all the funds were recorded as spent on the same tax year on your project, then you can be fully offset from federal income tax. If not, you may need to pay the sum based on your earning for the past years. In general for income tax, you will require being taxed for every cent that you earned as income.

Once you have fulfilled your pledges and have a good record of every transaction for IRS audit, you will be fine.

Another concern is on the sale tax. This tax is applicable to every single pledge transaction going on from one to another. Based on the states you are living in, the percentage may vary. Read here to check your state’s local sale tax rate and talk to your local government for detail.

So now you have the basic understanding of crowdfunds tax.

If you are very new to Kickstarter, here is a step by step handbook I found on Amazon to help you build a successful crowdfunding campaign from scratch.

What about a bigger budget project?

For some of the campaign that has more than $20,000 gross volume per year or has more than 200 separate transactions, you should receive a copy of the 1099-K form from Kickstarter. As the Kickstarter has their new third party payment processing company, Stripe, handling the payment, your earnings will be automatically tracked and submitted to IRS on your behalf.

Does that mean you will be freed from taxes if it’s below $20,000?

Not really, $20,000 stands for a higher threshold, meaning you will need to pay more. Meanwhile, regardless the amount of money you raised, you will still need to pay taxes based on that amount collected.

So, the thousand dollars question — should you create a business company for your Kickstarter project? or, as a sole trader Individual?

To deal with taxes, should you register yourself as a company (e.g. LLC, C-corp, and S-corp ) or individual?

Joshua Lance, a certified public accountant, said. “For most people, very few things are deductible, aside from your mortgage interest and charitable contributions, but for businesses, most of your expenses are deductible.”

Even though Kickstarter is open to everyone, but one has to be at least 18 years of age or older prior launching a campaign, in most country, it is also the minimum age to create a company. In the US, a couple of hundred bucks will give you a business name and legal protection over your assets. So, should you create a project in your own name (as an individual) or a registered legal entity? There is no best answer, but a good rule of thumb is let’s say you are running a small campaign, that would be better to go as an individual than a cooperate. The reason is simple — smaller project, such as card games, is having a lesser legal risk between the founders, and therefore, there is no need to spend more money (fees and tax) creating a company. On one hand, you guessed it — less hassle.

However, if you have a relatively bigger project (or intended in the future), it would be ideal to go as a corporate. Below are some of the benefits of why you should register a company instead:

  • Separate your personal asset from business’s —You can have a separate account under your business name. A good layer of legal protection over your personal asset in case of any wrong business action. For example, managing business with your personal account in one may potentially cause confusion or even losses to your personal assets such as car, house, and savings, if anything did not go according to plan.
  • Avoid conflict and Interest with co-founders — Having a black-and-white written agreement between partners outline the equity and each of the shares owned. Unlike verbal promises, this will avoid future conflicts between the founders also for ease in case of selling equity.
  • Better brand name and accountability — By having a company also means a solid system and structure under the flagship. Customer, investor, and supplier will then have a better trust in your company and it helps to grow the reputation faster than a sole trader.
  • Minimize tax liability — In lower tax rate bracket (under $335,000), the individual tax rate is slightly lesser than corporate income tax. If the income is getting higher as your business grow, registering as a corporation will significantly reduce your tax burden. The table below gives you a clearer picture comparing corporate versus individual income tax rate.

Corporate Income Tax 2017

Amount Over (USD)Amount Below (USD)Percentage on Excess (%)
$0$50,00015%
$50,000$75,00025%
$75,000$100,00034%
$100,000$335,00039%
$335,000$10,000,00034%
$10,000,000$15,000,00035%
$15,000,000$18,333,33338%
$18,333,333-35%

Individual (Single) Income Tax 2017

Amount Over (USD)Amount Below (USD)Percentage on Excess (%)
$0$9,32510%
$9,325 $37,95015%
$37,950 $91,90025%
$91,900$191,65028%
$191,650$416,70033%
$416,700$418,40035%
$418,400+-39.60%

The tables above show the United States taxable income for corporate and individual with filing status as “Single”. For married filing individual, please refer to the image below.

US Taxable income 2017

Bottom Line

Tax issues for crowdfunding projects is certainly a hassle, especially for those who are not sure how to deal with it. It’s even more surprising when you first receive a warning bill from IRS for the tax that you owed over a year past, that’s not fun at all. For your peace of mind, it is also our responsibility to pay income tax from any taxable source, including Kickstarter. One last thing to remember is to keep all the records and transactions clean and tidy, you will then be fine.

Depends on your project and interest, no one can answer your tax question better than your tax pro. Even Kickstarter can’t give a legal tax advice. The best practice for you is to contact your state’s tax authorities, tax attorney and filling up forms beforehand so to avoid any penalty.

Disclaimer
Please be noted that this is not a legal advice. This article serves as a reference purpose for those who are not familiar with the US tax system. Talk to your CPA, attorney or local authorities for any tax-related issues.

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