Vital Crowdfunding Tax Tips

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With $42,000 in Kickstarter pledges, a Salt Lake City entrepreneur named Jenny Wecker completed 300 diaper bags that she had personally designed. The only problem is that the federal government requires a 1099-K form to be sent when a certain number of payments are processed. This becomes income for sole proprietors that can be a big surprise when it comes to take time.

Even at just 15%, that $42,000 for Wecker becomes a nearly $5,000 tax liability. The only problem is that the tax burdens don’t just stop there. Because many of the goods that are “sold” through crowdfunding platforms right now are considered to be retail, a sales tax is often required to be collected on all same-state purchases that happen.

That’s information that isn’t collected by crowdfunding campaigns. It is information that must be sorted out through the shipping invoices and that can be a lengthy process.

Imagine Needing To Sort Out 10,000 Purchases All Alone…

A crowdfunding project creator has no way of knowing how local their support base is going to be. This means there is no way to even give an educated guess as to how much in local sales tax must be collected from project supporters. Some entrepreneurs put in a small increase for everyone so that the figure balances itself out in the end – hopefully, anyway.

Most don’t even bother to try. If you get a local backer, many crowdfunders decide to just take the financial hit and pay the tax burden. With a global presence, local backers often are a small fraction of who actually supports the campaign. Sorting out 10k backers with 10% of them being local, however, could be a huge financial hit if it wasn’t planned for in some way.

Even Tax Advisors Are Split On How To Treat Purchases

The IRS defines a gift as money given without expecting something of equal value in return. Most rewards don’t pass this definition, including Wecker’s diaper bags. She got $115 donations, but is pricing the bags at $130. There is no guidance on this subject.

This means there is no easy answer, but there is one guarantee: the taxman is coming to figure out what the fair share of an entrepreneur’s profits are going to be. Make sure to take tax implications into consideration as you plan your next campaign. Everyone makes a mistake or two when they get started with a business. The trick is to not make that mistake more than once.