Whether you’re planning to launch a crowdfunding project or you’ve already hit your goal, it’s critical that you think about the tax implications of your campaign. While this would typically be the height of tax season, the IRS has extended the U.S. federal tax deadline from April 15 to July 15, 2020, in response to the COVID-19 outbreak (many state deadlines have been extended as well). Although there are technically a few more months before you have to buckle down and start preparing to file, it’s never too early to get started. Crowdfunding creators should keep these five factors in mind as they get their taxes ready.
The difference between taxable income and gifts
When you receive money as a gift, it isn’t typically considered taxable income. When you receive money through a business transaction or sale, it is taxable income. Because of the supportive, often altruistic nature of crowdfunding, the distinction between a gift and taxable income may seem a little unclear. But the bottom line is that while donations on platforms like GoFundMe that are for life events like medical bills or education are generally considered gifts, if you’re running a Kickstarter or Indiegogo campaign, and your backers are receiving something of value in return for their pledge, the funds are going to be subject to taxes.
Form 1099-K is a summary of a crowdfunding creator’s sales transactions and is intended to help you report your taxes. It will be sent to campaign organizers with a U.S. bank account whose campaigns raised more than $20,000 and had more than 200 backers. You should receive the form by January 31st, if you received payments in the prior calendar year. Check with Kickstarter and Indiegogo to find out more about what you can expect from the form.
When filing your taxes, remember that you must report all of the income that you made from your campaign, which can include amounts shown on Form 1099-K, as well as any other money you received. It’s important to note that creators who don’t receive Form 1099-K and didn’t meet that $20,000 threshold will still have to pay taxes.
After you survey your backers, you can download Accounting Reports from BackerKit that provide a detailed breakdown of the funds you raised during and after the campaign. This will be helpful as you determine how much income you generated from your project.
Keep track of your expenses
Tracking expenses is a good practice to adopt when you begin any entrepreneurial endeavor — it keeps you on budget and will reveal any bad spending habits. But when you’re preparing for tax season, this information could potentially help you save money or protect you during an audit. As a crowdfunding creator, you may be able to deduct project-related expenses, such as tier-level gifts, from your taxes. If you have all of your receipts and invoices — from launch to fulfillment — your accountant will be better able to determine which deductions you qualify for.
End of the year crowdfunding projects and taxes
Launching your project in December could impact your tax preparations. When determining the tax year, Kickstarter points out that Stripe, their payment processor, reports the income that you’ll find on Form 1099-K according to the project deadline date and not the payout date. The payout date is 14 days after the project deadline date. So if your project deadline date was in 2019 but your payout date was in 2020, the funds will apply to your 2019 returns.
Another factor to consider when it comes to year-end projects is your ability to offset expenses that you won’t incur until the next year. If your income and expenses are in different years, you won’t be able to deduct expenses, which means you could end up having to pay more income tax and possibly have to dip into the funds you intended to use for your project. To safeguard against this, it’s always a good idea to create a funding goal that factors in taxes and the cost of your pledge manager. You may also end up offsetting some of your tax fees through pre-orders and add-ons.
Ensuring crowdfunding creators are compliant when filing taxes
Tax laws can vary by location. For example, depending on where in the U.S. you live, the 1099-K eligibility threshold may be lower. New tax laws will also be introduced from year to year. The best way to make sure that you meet all of your state and federal tax obligations is to speak with a certified tax professional. Even if your project goal was relatively small and your taxes seem straightforward, working with a professional can give you peace of mind during a time that is notoriously hectic.
No one wants to scramble at the last minute to file their taxes — it’s stressful and can lead to costly mistakes. If you aren’t prepared for tax season, now is the time to get started.
If you’re planning your campaign, our webinar on pre-launch do’s and don’ts can help you get started. Has your project already been funded? Check out our webinar on post-campaign do’s and don’ts.
Disclaimer: BackerKit does not provide tax advice. The information presented here is for informational purposes only, and does not constitute tax, legal or accounting advice. Consult a tax attorney, accounting adviser, or your local tax authority regarding the obligations that pertain to your project.