Are you thinking about launching a crowdfunding campaign? Did you know you might have to pay income taxes? Read this before you launch.
Is Crowdfunding Taxable?
Crowdfunding for a business is almost always taxable. That’s because the contributors almost always get something in return. Taking someone’s money and giving them something is a sale. It doesn’t matter if you call it a donation or you’re not charging your full planned market price. If you promise to provide something to your contributors, it’s a sale.
Just like any other sale, your profits are subject to income taxes. You may also need to collect sales taxes depending on your state.
Can You Deduct Your Expenses?
You can deduct your expenses from crowdfunding transactions just like you would for any other sale. This includes your inventory costs, production costs, payment processing fees, wages, and other ordinary and necessary business expenses.
When Do You Pay Income Taxes on Crowdfunding?
You pay income taxes when you file your income tax return. For most people, the income will go on the personal income tax return they file in April. If you form a partnership, LLC or corporation, the date may vary based on the business type and when you started it.
If you expect your campaign to go beyond the new year, you should be aware of cash versus accrual accounting.
- In cash accounting, you count the income in the year you receive the money.
- In accrual accounting, you count the income when you ship the product.
Let’s say you start a campaign in December 2018, buy the inventory you need in January 2019, and ship the product in February. With cash accounting, you’ll have to pay 2018 income taxes on the money you raised in December. Your first-year tax bill will be higher because you won’t get a deduction for product costs until 2019. With accrual accounting, you won’t pay taxes until 2019, when you can take your full deductions.
What About Crowdfunding Sales Taxes?
If you have to collect sales taxes, you must file a sales tax return with your state. This might be weekly, monthly, quarterly or annually depending on your state and total revenue.
When you collect sales tax, you’re holding your customer’s money for the government. It doesn’t belong to you, and if you spend it or don’t send it to the state on time, you could face heavy fines or possible criminal charges.
What Happens if You Don’t Meet Your Funding Goals?
If you don’t meet your funding goals and have to return the money, it’s just like any other refund. Subtract the money you returned from your revenue. It won’t be included in your profit, so you won’t pay taxes on it.
One exception is if you use cash accounting and receive the money in one year and refund it the next. In that case, it will count towards your profit for the year you received it, but you’ll get a deduction for the refund in the year you refunded it.
What About Equity Crowdfunding?
Equity crowdfunding is a newer type of crowdfunding in which you give shares of your company instead of an early version of your product. Just like other stock sales, equity crowdfunding sales are exempt from income tax. However, your investors will need to pay capital gains taxes if they sell at a profit. If you use a portion of the money you raise to pay yourself a salary, you’ll need to pay personal income taxes on that amount.
How Do You Track Everything?
You should use bookkeeping software to track your income from the campaign as well as the expenses for starting your business and delivering the product. To get set up and learn more about the taxes you’ll need to pay, contact us to schedule a free consultation.