Popular crowdsourcing websites and applications like KickStarter, GoFundMe and others have become more widely used for a variety of fundraising needs. There have been funds established for medical bills, funeral expenses, business development and product development/invention. There was even a high-profile campaign to raise money to develop the perfect potato salad recipe.
These platforms are great options for both business and personal needs, because they are examples of how “microfinancing” can work in the real world. Instead of one lender, like a bank or a credit union, taking a chance on a project through a loan or line of credit, countless individuals and small business owners are able to provide small amounts that collectively make a huge difference in a person’s life.
One thing to remember about crowdsourcing sites like KickStarteris that the funds raised are generally considered to be income for taxation purposes. This means that you’ll need to report funds received to the IRS. Texas doesn’t have state-level income tax, but federal taxes will still be the responsibility of the person who received the funds. There could still be sales tax due, depending on the physical proximity of the people offering the funds and those receiving it.
This isn’t to say that you’ll be penalized financially for using crowdsourcing platforms for your fundraising needs. If you pay out expenses in the amount of the funds you raised in the same fiscal year, you will likely be able to offset the income through deductions. Even if you don’t expense the funds in the same year, the accrual method of accounting might still let you offset the income and save yourself from tax penalties.
Important financial decisions regarding funding, particularly where taxation is concerned – because the IRS is dogged in their pursuit of tax payments – should be made only after very careful consideration of all possible implications and with an eye towards both short-term and long-term tax compliance. Call a tax attorney if you have questions about your business funding needs.