Crowdfunding websites such as Kickstarter, GoFundMe, Indiegogo, and Lending Club have become increasingly popular for both individual fundraising and small business owners looking for start-up capital or funding for creative ventures. The upside is that it's often possible to raise the cash you need but the downside is that the IRS considers that money taxable income. Here's what you need to know.
Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. Crowdfunding was initially used by musicians, filmmakers, and other creative types to raise small sums of money for projects that were unlikely to turn a profit. Now it is used to fund a variety of projects, events, and products and in some cases, has become an alternative to venture capital. There are three types of crowdfunding: donation-based, reward-based, and equity-based. Donation-based crowdfunding is when people donate to a cause, project, or event. GoFundMe is the most well-known example of donation-based crowdfunding with pages typically set up by a friend or family member ("the agent") such as to help someone ("the beneficiary") pay for medical expenses, tuition, or natural disaster recovery. Reward-based crowdfunding involves an exchange of goods and services for a monetary donation, whereas, in equity-based crowdfunding, donors receive equity for their contribution.
This is where it can get tricky. As the agent, or person who set up the crowdfunding account, the money goes directly to you; however, you may or may not be the beneficiary of the funds. If you are both the agent and the beneficiary you would be responsible for reporting this income. If you are acting as "the agent", and establish that you are indeed, acting as an agent for a beneficiary who is not yourself, the funds will be taxable to the beneficiary when paid--not to you, the agent. An easy way to circumvent this issue is to make sure when you are setting up a crowdfunding account such as GoFundMe you clearly designate whether you are setting up the campaign for yourself or someone else. Again, as noted above, as the beneficiary, all income you receive, regardless of the source, is considered taxable income in the eyes of the IRS--including crowdfunding dollars. However, money donated or pledged without receiving something in return may be considered a "gift." As such the recipient does not pay any tax. Up to $15,000 per year per recipient may be given by the "gift giver." Let's look at an example of reward-based crowdfunding. Say you develop a prototype for a product that looks promising. You run a Kickstarter campaign to raise additional funding, setting a goal of $15,000 and offer a small gift in the form of a t-shirt, cup with a logo or a bumper sticker to your donors. Your campaign is more successful than you anticipated it would be and you raise $35,000--more than twice your goal. Taxable sale. Because you offered something (a gift or reward) in return for a payment pledge it is considered a sale. As such, it may be subject to sales and use tax. Taxable income. Since you raised $35,000, that amount is considered taxable income. But even if you only raised $15,000 and offered no gift, the $15,000 is still considered taxable income and should be reported as such on your tax return--even though you did not receive a Form 1099-K from a third party payment processor (more about this below). Generally, crowdfunding revenues are included in income as long as they are not: Loans that must be repaid; Capital contributed to an entity in exchange for an equity interest in the entity; or Gifts made out of detached generosity and without any "quid pro quo." However, a voluntary transfer without a "quid pro quo" isn't necessarily a gift for federal income tax purposes. Income offset by business expenses. You may not owe taxes however, if your crowdfunding campaign is deemed a trade or active business (and not a hobby) your business expenses may offset your tax liability. Factors affecting which expenses could be deductible against crowdfunding income include whether the business is a start-up and which accounting method (cash vs. accrual) you use for your funds. For example, if your business is a startup you may qualify for additional tax benefits such as deducting startup costs or applying part or all of the research and development credit against payroll tax liability instead of income tax liability. Timing of the crowdfunding campaign, receipt of funds, and when expenses are incurred also affect whether business expenses will offset taxable income in a given tax year. For instance, if your crowdfunding campaign ends in October but the project is delayed until January of the following year it is likely that there will be few business expenses to offset the income received from the crowdfunding campaign since most expenses are incurred during or after project completion.
Typically, companies that issue third-party payment transactions such as Amazon if you use Kickstarter, PayPal if you use Indiegogo, or WePay if you use GoFundMe) are required to report payments that exceed a threshold amount of $20,000 and 200 transactions to the IRS using Form 1099-K, Payment Card and Third Party Network Transactions. The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions. Form 1099-K includes the gross amount of all reportable payment transactions and is sent to the taxpayer by January 31 if payments were received in the prior calendar year. Include the amount found on your Form 1099-K when figuring your income on your tax return, generally, Schedule C, Profit or Loss from Business for most small business owners. Again, tax law is not clear on this when it comes to crowdfunding donations. Some third-party payment processors may deem these donations as gifts and do not issue a 1099-K. This is why it is important to keep good records of transactions relating to your crowdfunding campaign including a screenshot of the crowdfunding campaign (it could be several years before the IRS â€œcatches upâ€) and documentation of any money transfers. Don't Get Caught Short. If you're thinking of crowdfunding to raise money for your small business or startup or for a personal cause, consult a tax and accounting professional first. Don't make the mistake of using all of your crowdfunding dollars on your project and then discovering you owe tax and have no money with which to pay it.
Just recently I heard Andy Fastow speak at a local meeting of financial consultants. What I heard surprised me a bit. But I’m probably getting ahead of myself. Just as a reminder. He was the CFO of Enron, based in Houston and one of the largest capitalized companies at that time; and for his deeds received a nine year prison sentence. First he apologized to his audience and asked for forgiveness if he had financially damaged or otherwise harmed anyone. Second, he discussed the distinction between ethics and the law. He stated that the accounting practices he undertook and those under him while at Enron were deemed legal as well as ethical. In fact the accountants and lawyers at that time signed off. So I’ll leave it to you to find out why he went afoul of the law.
A trip to Havana seems as if life is not really what it seems to be. Maybe Cuba is the incarnation of living in Alice in Wonderland’s world. The city and the country appear to be in a time warp almost like the 1950s in the US. Although almost all Cubans exhibit genuine warmth, charm and civility, which parts of our own country once possessed and seem to have lost in our current period of social and political upheaval. For a moment it is almost possible while visiting the island 50 miles off the coast of Florida to relive the glowing period of American history when adult couples played bridge, men played golf at the club and drank highballs, usually prepared by the “little woman” before dinner. But the polite and truly caring society of Cuba has a more dismal physical and economic backdrop. Behind it all is an impoverished country rich in natural resources. Cuba, in many ways, has a third world or underdeveloped, crumbling infrastructure where wealth is essentially concentrated in the hands of the governmental elite and the military. But the two groups are synonymous since the military controls upwards of sixty percent of the Cuban... READ MORE
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The Financial Times recently used Prattle’s analytics to visualize the tone of Fed communications dating back to the late 1990s. Prattle quantifies the market impact of language. Their text analysis technology is primarily used to understand the impact of corporate and central bank communications. Prattle automates investment research by quantifying language, producing analytics that predict the market impact of central bank and corporate communications.
Just two weeks after Janet Yellen gave the Federal Reserve’s strongest signal yet that it is going to lift rates again, sentiment analysis of Fed communications over the past month indicates that the central bank is fast becoming more hawkish.
“The speed with which the aggregate trend rose in the last few weeks is remarkable,” says Evan Schnidman, co-founder and chief executive of Prattle, a data analytics company that turns central bank speeches into signals that can be traded.
“Four weeks ago, there was no rational way I would have been able to say it was likely the Fed was going to raise rates,” says Mr Schnidman. “Now they’re back to being almost as hawkish as they were leading into their last rate hike.”
The growth in the frequency of policymakers’ statements, press releases and testimonies since 1998, when the Fed began communicating about rate moves publicly under pressure from Congress, has allowed Prattle to score communications by sentiment — from dovish to hawkish — and mine that data for indications of potential rate moves.
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