How are taxes typically handled (personal income, corporate income, "sales," etc.) for crowdfunded income?
I know that several aspects of this question will have varying issues depending on state, country, etc. But let's either try to come up with a general guideline for how to handle -- or how to properly research -- your tax liability when it comes to receiving the funds from your successfully funded Kickstarter Project. Here are some points I think really need to be covered:
- How does Kickstarter Project income get filed for personal and corporate taxes? How does this vary by state or country? For the US, are there any documents officially stating a procedure for this situation from the IRS or from any local governments?
- Do any states require you to collect sales tax on goods given out as rewards for crowdfunding? If so, which states? Where is this in writing? This seems silly, because you are not selling a product, so much as hoping to accomplish a task and giving a product to the people that helped you do it, if you succeed.
- If you're receiving the money into your personal account, but using it to create a business, what's the best way to "transfer" or "invest" that money into the business?
- How do you report "expenses" if you're making parts/supplies/ingredients/etc. purchases before the business (if any) is established?
I feel as though there are a lot of gray areas regarding taxes on income acquired in this way. I don't expect any serious tax advice, but rather, some resources that we could pool together. I highly recommend speaking with an attorney and/or accountant after you have all of your ducks in a row... But... how does one get all of their ducks in a row?
We incorporated, but Amazon sent the money to MY ssn (Amazon used to be the payment processor for Kickstarter in 2015 at time of comment - Stripe could assign to your SSN if not filed correctly so details still apply). I just got a bill from the IRS 2 years later saying we owe $35,000 in taxes and penalties. (Thanks Amazon). This money has been reported through our Gate Keeper Games business account, and our Accountant is working it out with the IRS so there's no actual penalty. But it's a fine example of how very very screwed you're going to be if you make a lot of money and don't have a business with Accrual Style accounting to offset taxes until production is done.
Lay Waste Games suggested LegalZoom. They seem reliable. We incorporated through Rocket Lawyer. They were great and has us incorporated in 48 hours. It was also super cheap. No need for a real life lawyer for incorporation. - FYI, we're an S-Corp, there are benefits to LLCs and S-Corps. Talk to at least 2 accountants. Liberty Tax usually gives free advice over the phone, so you can call them. Then call some expensive guy up the street from you, and talk to him too. He'll give free advice to earn you as a customer; and if he doesn't, then you DO NOT want him as your accountant.
We just went through this, so allow me to add in what I know. Keep in mind I am not a financial professional in ANY way. All I can do is share my experiences. First, check the last question on this page: https://www.kickstarter.com/help/taxes
Regarding expenses before the company was created, you can collect your receipts and submit them for reimbursement through your company. Then your company would use those purchases as deductibles. You could also choose to use them when submitting your own taxes if you decide to not start a company officially (like an LLC C Corp or S Corp). However, starting an LLC through LegalZoom is super easy AND you get a free call for financial advise through 1800ACCOUNTANT. Very helpful stuff. Plus you get taxed like crazy if you operate under your own name. At bare minimum, start an LLC. Makes your life easier in the long run.
Almost anyone running a kickstarter above $5k should get an LLC or S-Corp. It usually costs a couple hundred dollars to do it through Legalzoom, or you can file the paperwork yourself. Of course I'm speaking in regards to the USA, laws certainly are different in other countries.
Once you have the EIN for your company, get a business bank account and use that with Kickstarter. Takes about an hour at most banks. Usually a $15 monthly fee for the account although sometimes they give you the first couple months free.
If you are creating and shipping physical products of any sort, you need to get a business entity. Not just because then you are taxed on net profit after cost of goods, but there are other liabilities to physical products.
Hey y'all, Carol from Kickstarter here. We know that questions around taxes come up often, so we did a Q&A with a tax professional that has helped some creators with their taxes. We also included links to a few other resources we found on the web. Hope it's helpful!
My Wife is an Accountant and she advises the funds are personal income. Even if you are incorporated, you still have to file two tax returns, because the funds are going into an account you or your business owns. When the funds are spent, then they can be written off as expenses. Whatever is profit is taxable income.
To add on top of the answer I gave previously, I just spent the past 24 hours feverishly looking for something beyond what Kickstarter offers on their website (https://www.kickstarter.com/help/taxes) regarding Kickstarters that span more than one year from funding to delivery.
If a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes. If a creator receives funding in one year and spends money on their project in a later year, consider whether their expenses can still offset their Kickstarter funding using the accrual method of accounting.
To give some greater detail on that last part, head over here and go to the section for Advanced Payment For Sales: https://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270659
"Advance Payment for Sales
Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. An agreement includes a gift certificate that can be redeemed for goods. Amounts due and payable are considered received.
How to report payments. Generally, include an advance payment in income in the year in which you receive it. However, you can use the alternative method, discussed next. Alternative method of reporting. Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or
Include any part of advance payments in income for financial reports under the method of accounting used for those reports. Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements.
You are a retailer. You use an accrual method of accounting and account for the sale of goods when you ship the goods. You use this method for both tax and financial reporting purposes. You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. However, see Exception for inventory goods, later.
Exception for inventory goods. If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. You account for the advance payment under the alternative method (discussed earlier).
You have received a substantial advance payment on the agreement (discussed next).
You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement.
These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered.
You must report any advance payments you receive after the second year in the year received. No further deferral is allowed."
These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments