Spring is officially here — hello daylight past 7 pm and enjoying the sun a little bit after work, too. And that makes everyone happier.
And as tax season rolls along here, we’ve been meeting with a bunch of Surprise, AZ clients, submitting returns, and helping many people navigate the economic crazy that keeps flying at us — what with large banks getting propped up with duct tape, market gyrations, and all kinds of inflation pressure still rippling through the country.
Want some peace of mind? The Tax Beacon, LLC team is right here:
Last month’s devastating earthquakes in Turkey/Syria, the ruinous winter storms and mudslides in California, and the world banking crisis (CreditSuisse AGAIN) remind us how suddenly life can change … and how it can quickly make people financially vulnerable.
And when you see others hurting and in need, empathy kicks in and you *may* want to help.
An increasingly-popular method of giving is via crowdfunding platforms. In a digital age, you can jump into giving and funnel it right to the source (hopefully). You might even start a GoFundMe campaign to raise money for a friend’s difficult situation. Or maybe you’ve been in a tough spot with medical bills and you’ve been the recipient of a giving campaign.
I applaud any and all giving measures. It’s an important part of caring for your Surprise, AZ “neighbor.”
But if you do decide to jump in on a GoFundMe or find yourself on the receiving end of a crowdfunding campaign, I want to make sure you know what that means for your tax liability, so you’re not caught unawares when it comes to filing.
Let’s take a closer look.
Crowdfunding Campaigns: Baugus’s Tax Thoughts
“Money won’t create success, the freedom to make it will.” – Nelson Mandela
If you know anyone who’s suffered an expensive illness or wanted to get a new business off the ground, you probably have experience with crowdfunding. In the past 25 years or so — ever since a British rock band was first to “crowdfund” a concert tour with online donations from fans — it’s become a hot way to raise money for any number of projects, causes, and needs…
Hot way to get into tax trouble, too, if you’re not paying attention. Let’s look at what’s involved when crowdfunding meets taxes.
Three different kinds
Crowdfunding involves going online to ask people — family members, friends, and often scads of total strangers — for money. Before you smack your head and wonder, Why haven’t I done this before???, realize that the donations do usually have to be for a cause, such as pricey medical treatment, an art project, or a new business… to name just three of the limitless number of reasons. GoFundMe is a huge online platform for crowdfunding. Others include Indiegogo, Kickstarter, Patreon, and Mightycause.
There are three types of crowdfunding: donation-based, reward-based, and equity-based. Donation-based is when people donate to a cause, project, or event (GoFundMe is popular here). “Agents” set up pages to help “beneficiaries” pay large expenses. Pretty straightforward, especially concerning taxes on the money. Reward-based crowdfunding involves an exchange of goods and services for a monetary donation. In equity-based crowdfunding, donors get equity in return for their contribution. These are trickier when it comes to the IRS.
Personal vs. business
Everyone’s favorite federal agency considers all income taxable unless, under specific conditions, it isn’t. Crowdfunded donations may be considered non-taxable gifts if no goods or services are exchanged (in short, money was given to a cause with nothing material expected in return). The IRS refers to this as “contributors’ detached and disinterested generosity.”
Not only that, but you aren’t responsible for paying taxes on money you raise for someone else’s benefit if you hand it all over to them and you keep excellent records of the transactions (more on recordkeeping in a second — it’s very important). Agents just have to make certain that on, say, GoFundMe, they clearly designate that they’re setting the campaign up for another person.
(Individual donors should note that the annual gift-tax exclusion — how much you can give to one person before you pay the federal gift tax — is 17 grand for 2023.)
A warning: Giving even a cheap T-shirt to a donor can make the donation taxable income for you, even if the campaign is personal and not for business. And business crowdfunding money almost always counts as taxable income. Donations from an employer also go into the employee’s taxable gross income.
Some good news: Business contributions may not be taxable if you offer equity in your business instead of goods or services, and you might be able to offset crowdfunding income with business expenses.
Save those wrappers
The IRS can generally go back three years to audit your tax returns, so we recommend you keep all crowdfunding documentation (and we mean all), especially if you were an agent overseeing donations to a beneficiary. As you’re filling your shoeboxes with paperwork, also bear in mind that although they usually don’t, there are instances where they can go back farther than just three years…
With your records, you’re looking to prove who donated to the crowdfunding campaign, how much you raised, and who got the money and how. “Contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts,” the IRS warns.
Here’s how crowdfunding and taxes can get tricky, because you may get an IRS Form 1099-K for money raised through crowdfunding (especially if goods or services were exchanged for the donation): The crowdfunding website or its payment processor has to file a 1099-K with the IRS if, starting this year, the total of all payments distributed to a person exceeds just 600 bucks.
(That amount concerning 1099-Ks was supposed to kick in before now, but the IRS put it off a year. There’s always the chance they’ll put it off again, but do not bet on that.)
This doesn’t automatically mean the amount is taxable, but if you don’t include mention of it on your tax return, they might well reach out to learn why. It’s best to play it safe and document all your crowdfunding activity, whether you suspect the money is taxable or not.
Sometimes, money and taxes only seem to get more complicated these days… but that’s why we’re here. If you organized a crowdfunding campaign last year (or are thinking about doing one), let’s chat!