When you raise money for your business through crowdfunding your goal is to have the funds needed for a specific purpose. The last thing you probably are thinking about is taxes. However, you can’t avoid the subject.
Whether the money you get is taxable all depends on the type of crowdfunding you use.
The IRS recently gave some informal guidance on the tax consequences of crowdfunding.
Types of crowdfunding
Crowdfunding is a way to raise a little bit of money from a lot of people. For small businesses, crowdfunding has been used to underwrite special projects as well as starting and growing companies.
The three basic types of crowdfunding are:
EQUITY. The investor gets an ownership interest in the business. Equity crowdfunding was made possible by the JOBS Act and subsequent SEC final rules (learn more about equity crowdfunding from the Small Business & Entrepreneurship Council). Find a review of the 2016 best equity crowdfunding sites from Business.com, including Fundable and EquityNet.
GIFTS. The contributor gives money because he or she just wants to help. The contributor may receive a token in return, such as a sample of an item created with the donation, but nothing of real value. Websites include GoFundMe and Indiegogo.
The IRS says the tax consequences depend on the type of crowdfunding being used. Revenue raised from crowdfunding are not included in gross income if any of the three situations apply (i.e., if any of the types of crowdfunding described above are used without any variation):
- The money is loans that must be repaid.
- The money is capital contributions to the equity in exchange for an ownership interest in the business.
- The money is gifts made out of detached generosity and without any “quid pro quo. The IRS cautions that a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.
Revenues raised from crowdfunding are included in gross income (i.e., taxable) if received for services rendered or are gains from the sale of property.
If you have a great idea and need money to bring the idea to market, crowdfunding may be a solution. Take the time to decide which type of crowdfunding is best suited for your needs. Then understand the tax results you’ll have if your efforts are successful.