Crowdfunding is small donations/investments of capital from many people so that businesses or individuals can finance new ventures and it has become more and more prevalent over the years. Through websites such as Kickstarter, GoFundMe and Patreon, it’s easier to give funds that help people and small businesses in need.
But what are the tax implications of crowdfunding? Are the funds considered donations, income, gifts? The answer depends on who is receiving the funds and what they’re giving in return.
Can I claim the crowdfunding contributions as charitable donations on my tax returns?
During the pandemic, Carolyn gave money to two crowdfunding projects; a Kickstarter to help a local restaurant and a GoFundMe so a friend’s uncle could make his home wheelchair accessible. While she did it for charitable reasons (to keep a business in her neighborhood open and to help a man continue to live independently), in neither case was the money a charitable donation.
Because it wasn’t used for a business venture and because she received nothing in return, the funds given to the friend’s uncle were considered a personal gift. Personal gifts are not tax deductible, but (good news for the uncle) as long as he received less than $15,000 from any one person and less than $750,000 total over his lifetime, the money isn’t taxable either.
The gift to the restaurant, because it was a business, does count as taxable income for the restaurant. They had to claim all the funds donated through Kickstarter, even though they didn’t provide anything in return.
It is possible for recognized nonprofits (organizations with 501(c)3 status) to fundraise through crowdsourcing websites. But if the organization doesn’t specifically tell you, they’re a 501(c)3 and doesn’t give you their EIN (tax ID number), then chances are, they are not an IRS recognized nonprofit and you can’t claim the money donated to them. They may be raising funds for worthy causes, but if they do not have nonprofit status, donations aren’t tax deductible. To see if your donation is tax deductible you can verify an organization’s charitable status here: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.
What do I need to have to claim crowdfunding donations on my returns?
As with everything tax related, keep extensive records. Nonprofits send out donation acknowledgement, usually emails, but sometimes via USPS. Save these letters with your tax documents, so if you’re ever audited, you can verify the charitable donations.
For business income, keep your bank or credit card statements and note where the income came from.
Because everyone’s tax situation is unique to them, it is recommended that you consult a tax professional who can give specific advice tailored to you. If you are considering setting up a crowdfunding project, you’ll want to know ahead of time what taxes you are liable for. Schedule your appointment here for a consult with Walter Moyer at The Bottom Line Inc. https://calendly.com/thebottomline