The Taxman Cometh for Kickstarter

It is a truth universally acknowledged that a new business model, recently acquiring financial success, must be in want of taxation. So it appears to be for Kickstarter, as I discovered, now that the first business tax filing deadlines are approaching me.

It turns out that the taxman is not very pleased with "exchanges that are a mix of commerce and patronage" -- he'd really prefer these to be clearly distinct activities. Because gift income or patronage may generally be treated as non-taxable, while commerce is subject to taxes at multiple levels -- both as income and as sales.

Several questions are relatively difficult to determine: is the money you receive in a Kickstart to be interpreted as a payment for delivery of a product (i.e. the reward)? Or is the money a donation (gift) with the reward being a nominal acknowledgment.

In practice, you have to think about each "reward" separately. Some people choose to take no reward, so their money is clearly a "gift", others take purely nominal gifts which you might get away with omitting. Others are clearly just commodity pre-sale purchases. If someone gives you more than the amount you have set for a given reward, then (probably) the reward amount is subject to sales tax, while the amount over that can be treated as gift income (or so it seems to me -- I'm not a lawyer, an accountant, or an employee of the IRS). Either way, you’d think the officials there would incorporate an elaborate internet tax prep system to handle this, right -- especially considering the diverse variety of ways that money exchanges hands

Of course, just to make this more fun, sales tax rules in the USA vary depending on where you live: by state, county, and city. Supposedly there are over 7000 jurisdictions. Have fun with that.

Regardless of how you make out on the sales tax angle, the money you make will probably have to be accounted as ordinary business income as far as the IRS is concerned. You might get away with calling it "gift" income, but the consensus seems to be that this is unlikely to satisfy the powers that be.

It's also at this point that I regret running my Kickstarter in December -- since I'm only spending the money now in 2012, but acquired it at the end of 2011. I'm going to have to call it all income for 2011, and I don't get to take out the expenses until my 2012 taxes. Oops! This probably means I'll show a "profit" in 2011 followed by a "loss" in 2012 instead of the reality which is pretty close to "breaking even".

You might want to think about these things before setting up your own crowdfunding campaign.

Photo Credit: 401K@Flickr / CC By-SA 3.0


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