Many have participated in, or know someone who has launched, a “Kickstarter” campaign or other online means of securing funds for a project. Others may have encountered a request for contributions to a “fund” for some tragic occurrence (such as a scholarship fund for the children of a decedent) which is not supported by a charitable organization. Such projects, generally known by the term “crowdfunding”, raise interesting tax issues.
A third party (such as a credit card issuer or other payment collection service) need not report to the Internal Revenue Service the transactions of any participating payee (such as a musician, inventor, etc.) if the aggregate payments to the payee by the third party for the calendar year do not exceed $20,000 or if the aggregate number of transactions between the third party and the payee that would otherwise be reportable does not exceed 200 within the calendar year.
It is bedrock tax law that all amounts received by an individual are income to that person unless excluded under other provisions of tax law. A gift is excluded from the recipient’s income. However, there is no gift, under tax law, if there is something of value received in return for the payment to the recipient. All gifts are subject to the gift tax and the applicable annual “per donee (recipient)” and lifetime exclusion amounts.
In the charitable contribution arena, one looks to the “insubstantial benefit” test to determine if a “reward” given for a contribution if fully tax deductible. Presumably, the same rationale would apply to crowdfunding campaigns. For the 2015 tax year, the adjustments in the value of insubstantial benefits that may be received by a donor in return for a contribution without causing the contribution to fail to be fully deductible are:
- $10.50 (total of all low-cost gift items received by the donor)
- $52.50 (minimum amount of the donor’s contribution)
- $105 (fair market value of all the gifts received by the donor in connection with the contribution, or 2 percent, whichever is less)
With these latest adjustments, a gift can be ignored for tax purposes if the gift is no more than $105 or 2 percent of the payment, whichever is less. Alternatively, a gift can be ignored for tax purposes if a donation is $52.50 or more and the gift qualifies as a low-cost item. Low-cost items are, for example, token gifts such as tee shirts, coffee mugs, or key chains bearing the charity’s name or logo. The total of low-cost items cannot exceed a wholesale value of $10.50.
The expense of conducting a crowdfunding campaign (including the “incentives” mentioned above) may be deductible if the project involved is a trade or business carried on with the expectation of profit. In such a case, losses are handled in the same manner as any actively conducted business. However if there is no such profit expectation, (e.g. just getting a performer’s music “out there”) the “hobby loss” rules come into play and deductions are usually only allowed to the extent of income from the hobby. In evaluating the issue of the deduction of expenses, one must be aware of the “startup” expenditure rules which treat those expenses differently than those of an ongoing business, but generally would probably not apply in a smaller crowdfunding campaign below statutory limits regarding startup expenditures.
Finally, a charitable deduction is not allowed for contributions to an individual unless, possibly, the crowdfunding is sponsored by a charitable organization and the rules for charitable deductions are met.
PK Law’s Corporate and Business Services Group can help with setting up and monitoring crowdfunding campaigns. They can also provide advice and guidance on charitable donations and deductions.
This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.