Crowdfunding is simply any method by which money is raised, for any reason, from a crowd. Back in the pre-computer days, the terminology would have been “fundraiser.” It’s only the means by which the funds are raised that has changed, not necessarily that it hasn’t existed before.
The tax treatment of a transaction often depends on the intent of the donor. Most online crowdfunding campaigns are donation based. Funds are raised to help some charitable cause. It is also the most misunderstood.
Members of the public often erroneously believe that if their donation is for a charitable cause, then it must be deductible. However, contributions need to be made to a qualified charitable organization in order for them to be deductible as charitable contributions.
Donations to individuals are never deductible, no matter how charitable the cause.
If a donor receives a benefit (goods or services) as a result of making a contribution to a qualified organization, the deduction is limited to the amount of the contribution less the value of any goods or services received.
Qualified organizations typically fall into the categories of religion, charity, education, science, literature, and the arts, or they work on a social issue, such as to prevent cruelty to children or animals. Most organizations, other than churches or governments, must apply to the IRS to become a qualified organization. You can visit www.IRS.gov, click on the Tools tab, and choose Exempt Organizations Select Check to see if an organization is a qualified charity.
Another purpose of crowdfunding is to fund a business venture. Typically, a corporation is formed, and then a request is made for contributions for shares in the business. The business does not treat these fundraising contributions as income, while the shareholder has a share of stock with a value equal to the amount contributed.
If donations are made by a non-shareholder who is not receiving any ownership in the corporation, then the business is impacted by those donations, but they do not pick up any income. Also, if someone is starting a business and running it as a sole proprietor, meaning it is an unincorporated single-owner business, donations from a crowdfunded campaign to fund that sole proprietorship would be viewed by the IRS as business income to the sole proprietor.
Please contact me with questions or comments.
Susan A. Moussi, CPA, CFP®, CDFA SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 firstname.lastname@example.org