How Can Crowdfunding Creators Put together for Tax Day?

This yr, the US federal tax deadline is April 18, 2023. If you happen to aren’t already ready to file, you continue to have a while to get began. Whether or not you put together your taxes by yourself or rent knowledgeable, you may discover that submitting after a crowdfunding marketing campaign is a bit more complicated than submitting private earnings taxes. As a way to precisely report crowdfunded earnings, you might want very particular knowledge about if you earned cash and the place that cash got here from. Whereas we are able to’t provide accounting recommendation — and at all times suggest that you simply seek the advice of with a tax lawyer, accounting adviser, or your native tax authority — there are just a few points that the crowdfunding creators we’ve labored with usually run into, and that you must bear in mind whereas preparing for tax season.

Crowdfunding earnings have to be reported in your tax returns

You will want to pay tax after crowdfunding if backers obtain one thing of worth in alternate for pledging, which is mostly the case when elevating cash by way of reward-based crowdfunding. Crowdfunded cash acquired as a present is normally not thought-about taxable earnings. Whenever you file your taxes, you need to be reporting all the earnings you made by way of your Kickstarter, Indiegogo, or Crowdfunding by BackerKit initiatives for the yr. There are severe penalties, together with fines and prosecution, for not reporting all enterprise earnings or for incorrectly reporting earnings. We suggest that in case you’re a crowdfunding creator who has raised funds by way of Kickstarter, Indiegogo, or Crowdfunding by BackerKit, you converse to a tax skilled to make sure that you’re assembly all your tax obligations. 

How can crowdfunding creators decide how a lot cash to report on tax returns?

The crowdfunding platform you utilize will ship a 1099-Okay type to you in case you raised greater than $20,000 with greater than 200 backers, and you’ve got a US checking account. The shape will element the gross quantity of income you earned from crowdfunding transactions, and help you in reporting your earnings. 

Nonetheless, the 1099-Okay type doesn’t inform the total story about how a lot cash you, because the marketing campaign organizer, must report. Listed here are a few the reason why:

1. Even in case you don’t meet the thresholds for receiving the shape, you might be nonetheless required to report your crowdfunding earnings. 
2. Based on the Inner Income Service (IRS) web site, the shape doesn’t “embrace any changes for credit, money equivalents, low cost quantities, charges, refunded quantities or some other quantities.”
3. Undertaking transactions that had been generated exterior of Kickstarter or Indiegogo gained’t be reported on the 1099-Okay that you simply obtain from them, however you’ll nonetheless should pay taxes on these funds.
4. A number of the cash included within the type could also be tax-deductible. 

 

To see what your true taxable earnings is, it helps to get a breakdown of the cash you made. If you happen to had been preserving very clear data all through your marketing campaign about how all your funds had been being allotted, you need to use that as a information. However in case you haven’t carried out that, you don’t want to fret. With BackerKit Accounting Stories, you may see all the cash you raised by way of Kickstarter or Indiegogo campaigns in addition to cash raised by way of BackerKit. 

Obtain the Anticipated Income Report back to get an in depth breakdown of the place your income is coming from. Together with backer identification knowledge, like electronic mail and placement, this report exhibits you the pledge degree value, pledge degree upgrades, add-on value, delivery value, tax value and complete value for every backer. 

This report particulars the anticipated income on your backers in BackerKit, that means that is what your challenge is anticipating to gather primarily based on the present backer knowledge (no matter survey completion) in BackerKit. The report shall be extra correct after you’ve efficiently charged your backers in BackerKit. 

This report may also be useful all year long for bookkeeping functions. For instance, in some states, all delivery expenses are thought-about taxable. In different states, delivery expenses aren’t taxable. With the Anticipated Income Report, you may see which state cash is coming from and the way a lot of that cash is allotted for delivery, so you may decide if funds are taxable.

Determine which accounting technique you’re utilizing

There are two accounting strategies: accrual accounting and money foundation accounting. With the accrual technique, you document income if you present items or companies. If you happen to’re utilizing money foundation, nonetheless, you document income if you obtain cash, even in case you haven’t delivered the products or companies but. 

Whenever you pay taxes, you’ll must classify earnings primarily based on the accounting technique you’re utilizing. If you happen to’re utilizing the money technique, and also you acquire cash out of your backers through the 2020 tax yr, however gained’t ship out rewards till later in 2021, you’ll should report the cash in your 2020 tax returns. If you happen to’re utilizing the accrual technique, and also you acquire cash through the 2020 tax yr, however don’t ship till the 2021 tax yr, you gained’t should report that earnings in your 2020 tax returns. As a substitute, you’ll report the earnings the next tax yr.

Crowdfunding creators usually use the accrual technique. It lets you offset among the prices related to delivery and manufacturing that may happen a number of months after you’ve completed your marketing campaign. 

Whatever the technique that you simply’re utilizing, it would be best to know when transactions occurred. To do that in BackerKit, you may check out the Collected Income Report. That is an Accounting Report that exhibits you all the transactions that occurred in BackerKit. Additionally, towards the underside of the report, Kickstarter or Indiegogo transactions shall be listed within the part titled “platform_pledge.” The report shows the backer ID, backer electronic mail, backer state, backer nation, transaction ID, transaction date, transaction quantity, and transaction supply.

Making certain you find the money for to cowl taxes

With regards to paying taxes, nobody desires to dip into funds that weren’t already earmarked for that objective. As a creator, you might want that cash to cowl different facets of your challenge, like manufacturing prices. You may be sure you find the money for readily available to cowl your taxes by doing the next: 

1. Issue the taxes you’ll should pay into your funding purpose. It’s best to seek the advice of with an accountant and search for the federal tax charges to get an thought of what you’ll owe. 
2. Take a while to analysis the advantages of the accrual technique of accounting. As talked about earlier, you could possibly write off bills that happen after you’ve collected cash out of your backers. This might relieve a few of your tax burden.
3. Accumulate further taxes in BackerKit. Utilizing the Tax Guidelines characteristic, you may cost a further proportion primarily based on the entire value of the backer’s pledge degree plus the price of any add-ons chosen in BackerKit (minus delivery).

This characteristic enables you to set a tax charge primarily based on nation and/or state. Doing this may increasingly enhance the quantity a backer will owe, which gives you further funds when paying earnings tax. One added bonus: You probably have backers within the EU, you may as well add your VAT quantity and VAT handle within the Tax Guidelines part. This info will present up in your pack listing and backers’ affirmation screens and emails. 

What about gross sales tax?

Relying on the place you’re positioned, you might must pay gross sales tax. Sometimes, crowdfunding creators will solely should pay gross sales tax on transactions if they’ve a major connection to the situation of the backer. So in case you dwell in California, you could have to pay gross sales tax on all the transactions from backers in California. 

To determine your gross sales tax obligation, you will want to determine the place backers are positioned. 

Attempting to manually divide backers up by location could be difficult — particularly in case you have a lot of US and worldwide backers. One method to make this course of simpler is with BackerKit’s Segments device. Segments will let you zero in on particular backer knowledge factors.

Use the device to separate up your backers into smaller teams primarily based on standards equivalent to location, the objects they bought, or pledge degree. 

Tax season could be worrying. However if you’re ready, you may face it with confidence. Contact our staff to study extra about these BackerKit tax instruments and different options that can make it easier to keep organized and handle your crowdfunding campaigns. 

Disclaimer: BackerKit doesn’t present tax recommendation. The data offered right here is for informational functions solely, and doesn’t represent tax, authorized, or accounting recommendation. Seek the advice of a tax lawyer, accounting adviser, or your native tax authority relating to crowdfunding tax implications and obligations that pertain to your challenge. 

Editor’s Word: This weblog publish was initially printed in 2021. It has been up to date for relevance and accuracy.