With the onset of the coronavirus pandemic, crowdfunding websites such as Kickstarter and GoFundMe have become an increasingly popular way for small business owners to stay afloat. The upside is that it’s often possible to raise the cash you need; the downside is that the IRS considers that money taxable income. Let’s take a closer look at how crowdfunding works and how it could affect your tax situation.

What is Crowdfunding?

Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. It was initially used by musicians, filmmakers, and other creative types to raise small sums of money for projects that were unlikely to turn a profit. More recently, it has been used to fund projects, events, and products, and in some cases, has become an alternative to venture capital. With the onset of coronavirus, however, small business owners have turned to crowdfunding to raise cash to continue operating their business.

There are three types of crowdfunding: donation-based, reward-based, and equity-based. Donation-based crowdfunding is when people donate to a cause, project, or event. GoFundMe is the most well-known example of donation-based crowdfunding with pages typically set up by a friend or family member (“the agent”) such as to help someone (“the beneficiary”) pay for medical expenses, tuition, or natural disaster recovery.

Reward-based crowdfunding involves an exchange of goods and services for a monetary donation, whereas, in equity-based crowdfunding, donors receive equity for their contribution.

Are Crowdfunding Donations Taxable?

This is where it can get tricky. As the agent, or person who set up the crowdfunding account, the money goes directly to you; however, you may or may not be the beneficiary of the funds. If you are both the agent and the beneficiary you would be responsible for reporting this income. If you are acting as “the agent”, and establish that you are indeed, acting as an agent for a beneficiary who is not yourself, the funds will be taxable to the beneficiary when paid – not to you, the agent. An easy way to circumvent this issue is to make sure when you are setting up a crowdfunding account such as GoFundMe you designate whether you are setting up the campaign for yourself or someone else.

Again, as noted above, as the beneficiary, all income you receive, regardless of the source, is considered taxable income in the eyes of the IRS – including crowdfunding dollars. However, money donated or pledged without receiving something in return may be considered a “gift.” As such the recipient does not pay any tax. Up to $15,000 per year per recipient may be given by the “gift giver.”

Let’s look at an example of reward-based crowdfunding. Say you develop a prototype for a product that looks promising. You run a Kickstarter campaign to raise additional funding, setting a goal of $15,000, and offer a small gift in the form of a t-shirt, cup with a logo, or a bumper sticker to your donors. Your campaign is more successful than you anticipated it would be and you raise $35,000 – more than twice your goal.

Taxable sale. Because you offered something (a gift or reward) in return for a payment pledge it is considered a sale. As such, it may be subject to sales and use tax.

Taxable income. Since you raised $35,000, that amount is considered taxable income. But even if you only raised $15,000 and offered no gift, the $15,000 is still considered taxable income and should be reported as such on your tax return even though you did not receive a Form 1099-K from a third party payment processor (more about this below).

Generally, crowdfunding revenues are included in income as long as they are not:

• Loans that must be repaid;
• Capital contributed to an entity in exchange for an equity interest in the entity; or
• Gifts made out of detached generosity and without any “quid pro quo.” However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes.

Income offset by business expenses. You may not owe taxes however, if your crowdfunding campaign is deemed a trade or active business (and not a hobby) your business expenses may offset your tax liability.

Factors affecting which expenses could be deductible against crowdfunding income include whether the business is a start-up and which accounting method (cash vs. accrual) you use for your funds. For example, if your business is a startup you may qualify for additional tax benefits such as deducting startup costs or applying part or all of the research and development credit against payroll tax liability instead of income tax liability.

Timing of the crowdfunding campaign, receipt of funds, and when expenses are incurred also affect whether business expenses will offset taxable income in a given tax year. For instance, if your crowdfunding campaign ends in October but the project is delayed until January of the following year it is likely that there will be few business expenses to offset the income received from the crowdfunding campaign since most expenses are incurred during or after project completion.

How do I Report Funds on my Tax Return?

Typically, companies that issue third-party payment transactions such as Amazon if you use Kickstarter, PayPal if you use Indiegogo, or WePay if you use GoFundMe) are required to report payments that exceed a threshold amount of $20,000 and 200 transactions to the IRS using Form 1099-K, Payment Card and Third Party Network Transactions. The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.

Form 1099-K includes the gross amount of all reportable payment transactions and is sent to the taxpayer by January 31 if payments were received in the prior calendar year. Include the amount found on your Form 1099-K when figuring your income on your tax return, generally, Schedule C, Profit or Loss from Business for most small business owners.

Again, tax law is not clear on this when it comes to crowdfunding donations. Some third-party payment processors may deem these donations as gifts and do not issue a 1099-K. This is why it is important to keep good records of transactions relating to your crowdfunding campaign including a screenshot of the crowdfunding campaign (it could be several years before the IRS “catches up”) and documentation of any money transfers.

Seek Professional Tax Advice

If you’re thinking of using crowdfunding to raise money for your small business, call a tax and accounting professional who will evaluate your tax situation and help you figure out a course of action that will help your small business succeed.

If you’ve lost your job you may have questions about how it could affect your tax situation. Here are some answers:

Q: I lost my job. How does this affect my tax situation?

A: The loss of a job may create new tax issues. For example, any severance pay you receive is considered taxable income as are any payments for accumulated vacation or sick time. While it isn’t always possible to do so, making sure that enough taxes are withheld from these payments will help you to avoid a big bill at tax time.

Another thing to keep in mind is that if you receive unemployment compensation, this money is taxable. SNAP (formerly known as food stamps) and public assistance, however, are not taxable – nor are Economic Recovery Payments sent during the coronavirus pandemic.

Q: Am I eligible to receive unemployment compensation?

A: Depending on your circumstances, you may be eligible for one of the following types unemployment compensation:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability payments from a government program paid as a substitute for unemployment compensation
• Trade readjustment allowances under the Trade Act of 1974
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act
• Pandemic Unemployment Assistance (PUA) under the CARES Act of 2020

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, states are permitted to provide Pandemic Unemployment Assistance (PUA) to individuals who are self-employed, seeking part-time employment, or who otherwise would not qualify for regular unemployment compensation. To verify income, states are generally requiring applicants to provide current year tax forms.

Voluntarily deciding to quit your job out of a general concern about exposure to COVID-19 does not make you eligible for PUA; however, there are circumstances where an individual may be eligible for PUA.

Q: Is unemployment compensation tax-free?

A: No. Unemployment compensation received under the unemployment compensation laws of the United States or of a state is considered taxable income and must be reported on your federal tax return.

You must also include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, if you contribute to a special union fund and your contributions are not deductible, then other rules apply. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.

You can choose to have federal income tax withheld from your unemployment benefits by filling out Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office (e.g., your state’s Department of Labor), 10 percent of your payment amount will be held as tax. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year. You may also owe tax when you file your tax return next year.

If you received unemployment compensation, you will receive Form 1099-G, Certain Government Payments (Info Copy Only), showing the amount you were paid and any federal income tax you elected to have withheld.

Q: Can I deduct expenses related to a job search?

A: Under tax reform, many miscellaneous deductions were eliminated. As such, for tax years 2018-2025, you are no longer able to deduct certain expenses such as travel, resume preparation, and outplacement agency fees incurred while looking for a new job. In prior years, job-seekers were able to deduct these expenses even if they did not get a new job.

Normally, to collect unemployment compensation you have to actively be searching for work. However, the CARES Act gives states flexibility in determining whether an individual is “actively seeking work” if he or she is unable to search for work because of COVID-19, including because of illness, quarantine, or movement restrictions.

Q: What if my employer went out of business or into bankruptcy?

A: Your employer must provide you with a Form W-2 showing your wages and withholding by January 31. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fail to provide you with a Form W-2, contact the IRS. They can help by providing you with a substitute Form W-2.

If your employer liquidated your 401(k) plan, you have 60 days to roll it over into another qualified retirement plan or IRA.

If you’ve experienced a job loss during this difficult time and have questions about how it could affect your tax situation, please call.

Businesses that have been impacted financially by COVID-19 may be able to take advantage of a new, refundable tax credit called the Employee Retention Credit. The credit is designed to encourage businesses to keep employees on their payroll and is worth 50 percent of qualifying wages up to $10,000 that are paid by an eligible employer.

Does my business qualify for the Employee Retention Credit?

The credit is available to all qualified employers regardless of size, including tax-exempt organizations.

The credit is not available to small businesses who take small business loans or state and local governments and their instrumentalities.

What is a qualifying employer?

There are two categories of qualified employers:

• The employer’s business is fully or partially suspended by government order due to COVID-19 during a calendar quarter.
• The employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

How is the credit calculated?

The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care. Qualified health plan expenses generally include both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pretax salary reduction contributions. Amounts paid by the employee with after-tax contributions are not included.

What is a qualifying wage?

Qualifying wages are wages that are based on the average number of a business’s employees in 2019. There are two different measures for business, depending on size:

Employers with less than 100 employees. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.

Employers with more than 100 employees. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

How do I receive the credit?

While many tax credits are available when filing a tax return, the employee retention credit works differently in that employers can be reimbursed immediately by reducing their required payroll tax deposits. Payroll taxes, which include federal income tax withheld as well as taxable social security wages and tips, taxable Medicare wages and tips, and additional Medicare tax withholding, are taxes that have been withheld from employees’ wages. Generally, these payroll tax deposits are filed quarterly on Form 941, Employer’s Quarterly Federal Tax Return.

When can I start reporting qualified wages?

Eligible employers should report their total qualified wages and the related health insurance costs for each quarter on Form 941 beginning with the second quarter (March 12, 2020).

Wages paid through December 31, 2020, are also eligible for the credit.

What if my payroll tax deposits are less than the credit?

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19

Help is just a phone call away.

Please contact the office if you need more information on the Employer Retention Credit and other COVID-19 economic relief efforts.

As a reminder, taxpayers now have until July 15, 2020, to file and pay federal income taxes originally due on April 15 and no late-filing penalty, late-payment penalty or interest will be due. Due to the coronavirus pandemic, this relief has been expanded to include additional returns, tax payments and other actions:

• All taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020.
• Individuals, trusts, estates, corporations and other non-corporate tax filers now qualify for the extra time.
• Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.

Extension of time to file beyond July 15

• Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to October 15, 2020, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
• Businesses who need additional time must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

An extension to file is not an extension to pay any taxes owed. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by the July 15, 2020, deadline to avoid additional interest and penalties.

Estimated Tax Payments

Relief is also extended to estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.

Unclaimed Refunds

There is a three-year window of opportunity to claim a refund from prior years’ tax returns. If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. For 2016 tax returns, the normal April 15 deadline to claim a refund has also been extended to July 15, 2020.

If you have any questions regarding the coronavirus pandemic and your taxes, help is just a phone call away.