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Is Kickstarter or Crowdfunding Money Taxable Income?

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By Brett Snider, Esq. on July 22, 2014 6:59 AM

Small businesses may be very successful raising funds through Kickstarter, but those who receive those funds shouldn't forget the potential tax implications of crowdfunding.

For its part, Kickstarter (with the caveat that they are not tax attorneys) claims that in general, "funds raised on Kickstarter are considered income." However, the crowdfunding platform also claims that Kickstarters may be able to classify certain funds as "nontaxable gifts" instead.

So which is it? Should businesses treat Kickstarter or crowdfunding money as taxable income?

Need legal advice on how your small business should operate? Consult with an experienced business attorney about your options.

Income or Gift?

Business owners may want a concrete answer on whether crowdfunding monies are income or gifts for tax purposes, but here's the problem: There is no concrete legal answer yet. Tax expert Eva Rosenberg told the International Business Times that "[t]here's going to have to be a test case" on Kickstarter tax liability before the IRS sheds any light on the situation.

Perhaps the famous Kickstarter potato salad guy (who's now raised more than $60,000) can be the guinea pig in tax court. But while we're all waiting for Potato Salad v. IRS, let's look at the tax consequences for both income and gift classifications of crowdfunding.

If It's Taxable Income...

For some guidance, an IRS representative told IBT that "money received without an offsetting liability, that is not capital contribution or a gift, is includible in income." If you decide to treat your business' Kickstarter funds as income, you're going to have to report to the IRS.

However, if you spent those funds as you likely proposed -- on the costs of running and/or starting your business -- then you may be able to offset the tax liability of your Kickstarter income. If you spent the balance of your Kickstarter funds on deductible business expenses -- maybe even fancy business lunches -- then it's possible you may not owe any tax on your crowdfunded income.

This should be the case with most business Kickstarters, since your business should have formed a plan on how to leverage those funds into something bigger for your business.

If It's a (Taxable?) Gift...

If, for tax purposes, you treat Kickstarter funds like a gift, then what are the tax consequences? Well for starters, if they apply, gift taxes are generally paid by the gift-giver, not the one receiving the gift. So a particularly large Kickstarter donor may wish to report his or her Kickstarter donation as a gift for tax-exemption purposes, but a gift receiver typically need not report that money to the IRS.

This is a thorny issue, however, so it'd be wise for your Kickstarted business to contact an experienced tax attorney for guidance.

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