Are you thinking about launching a crowdfunding campaign? Did you know you might have to pay income taxes? Read this before you launch.

Is Crowdfunding Taxable?

Crowdfunding for a business is almost always taxable. That’s because the contributors almost always get something in return. Taking someone’s money and giving them something is a sale. It doesn’t matter if you call it a donation or you’re not charging your full planned market price. If you promise to provide something to your contributors, it’s a sale.
Just like any other sale, your profits are subject to income taxes. You may also need to collect sales taxes depending on your state.
 

Can You Deduct Your Expenses?

You can deduct your expenses from crowdfunding transactions just like you would for any other sale. This includes your inventory costs, production costs, payment processing fees, wages, and other ordinary and necessary business expenses.
 

When Do You Pay Income Taxes on Crowdfunding?

You pay income taxes when you file your income tax return. For most people, the income will go on the personal income tax return they file in April. If you form a partnership, LLC or corporation, the date may vary based on the business type and when you started it.
If you expect your campaign to go beyond the new year, you should be aware of  cash versus accrual accounting.
  • In cash accounting, you count the income in the year you receive the money.
  • In accrual accounting, you count the income when you ship the product.
Let’s say you start a campaign in December 2018, buy the inventory you need in January 2019, and ship the product in February. With cash accounting, you’ll have to pay 2018 income taxes on the money you raised in December. Your first-year tax bill will be higher because you won’t get a deduction for product costs until 2019. With accrual accounting, you won’t pay taxes until 2019, when you can take your full deductions.
 

What About Crowdfunding Sales Taxes?

If you have to collect sales taxes, you must file a sales tax return with your state. This might be weekly, monthly, quarterly or annually depending on your state and total revenue.
When you collect sales tax, you’re holding your customer’s money for the government. It doesn’t belong to you, and if you spend it or don’t send it to the state on time, you could face heavy fines or possible criminal charges.
 

What Happens if You Don’t Meet Your Funding Goals?

If you don’t meet your funding goals and have to return the money, it’s just like any other refund. Subtract the money you returned from your revenue. It won’t be included in your profit, so you won’t pay taxes on it.
One exception is if you use cash accounting and receive the money in one year and refund it the next. In that case, it will count towards your profit for the year you received it, but you’ll get a deduction for the refund in the year you refunded it.
 

What About Equity Crowdfunding?

Equity crowdfunding is a newer type of crowdfunding in which you give shares of your company instead of an early version of your product. Just like other stock sales, equity crowdfunding sales are exempt from income tax. However, your investors will need to pay capital gains taxes if they sell at a profit. If you use a portion of the money you raise to pay yourself a salary, you’ll need to pay personal income taxes on that amount.
 

How Do You Track Everything?

You should  use bookkeeping software to track your income from the campaign as well as the expenses for starting your business and delivering the product. To get set up and learn more about the taxes you’ll need to pay, contact us to schedule a free consultation or fill out the form below today.
 
Curt Mastio
Post by Curt Mastio
Nov 20, 2018 7:11:23 PM
Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.