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Declaring Taxes for a Crowd-funded Project

Declaring Taxes for a Crowd-funded Project

By on May 15, 2015 in Filing Taxes | 0 comments

Declaring Taxes for a Crowd-funded ProjectKickstarter, GoFundMe and other crowd-funding websites offer the opportunity to ask friends, family, and colleagues to financially support a new hobby, a passion project, invention or other artistic creation. They are incredibly popular, powerful and effective tools and can truly “kickstart” a small project into a hugely successful and viable one.

However, you should be aware that there might be tax implications for these transactions and donations. In many cases, the IRS views these donations as taxable income, especially as this type of support brings in millions of dollars in “startup” funds for new businesses.

Because this funding mechanism is so new and innovative, you may not find a lot of clear answers about how to declare taxes for a crowd-funded project. To be safe, experts recommend that you treat your project, hobby, etc. as a small business. Here are some basic tips for managing this complicated and evolving process.

Paypal and Amazon Are Sometimes Required to Submit Form 1099

Vendors like Paypal and Amazon Payments are vehicles for many crowdfunded projects and are required to submit a 1099 to the IRS for those who have earned $20,000 and 200 transactions in a year. If the IRS receives a 1099 from these organizations, you are required to pay income tax.

When the $20,000 Threshold Isn’t Met

Where things get a bit fuzzy is when this threshold is not met. Most tax professionals agree that regardless of the amount of income you receive, if it is above $600, the IRS likely expects you to declare it as income, even if a 1099 is not sent to the IRS.

What If It Was Given as a Gift?

The exception to this rule is when the money was given as a gift, with absolutely nothing expected in return. If you are receiving money to help offset expenses because your house recently burned down, that is a gift to you and you will likely not need to worry about federal income taxes.

Even this can be tricky, however, because you are leaving it to Paypal or Amazon to decide what is a gift and what is income. If they get it wrong, the IRS may have questions for you.

If you offer fun giveaways as incentives for supporting your idea, then you are giving your supporters something in return for their support, which means you will definitely be responsible for paying federal income taxes on that money.

Work With a Tax Firm

If you raise money through a Kickstarter campaign, you should consider partnering with a tax firm who can provide you sound advice, including encouraging you not to use all of your Kickstarter funds before you consider tax implications. It may be wise to save some of those funds for your federal income taxes.

Success Tax Relief: Proving Sound Advice for Crowd-funded Projects

The tax professionals at Success Tax Relief are current on all new tax laws and have worked with individuals who have successfully managed the tax implications of crowdfunded projects.

Our team understands the enormous power of these projects and will work to help you protect the donations coming in as much as possible, while protecting you from last minute panic over tax implications and/or audits from the IRS.

If you have received crowdfunding and have questions about how to declare your taxes, give us a call at 877-825-1179.

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