How Can Crowdfunding Creators Put together for Tax Day?

This yr, the US federal tax deadline is April 18, 2023. In the event you 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 an expert, you may discover that submitting after a crowdfunding marketing campaign is a bit more complicated than submitting private earnings taxes. In an effort to precisely report crowdfunded earnings, chances are you’ll want very particular knowledge about once you earned cash and the place that cash got here from. Whereas we will’t provide accounting recommendation — and at all times advocate that you just seek the advice of with a tax legal professional, accounting adviser, or your native tax authority — there are a couple of points that the crowdfunding creators we’ve labored with typically run into, and that you must have in mind whereas preparing for tax season.

Crowdfunding earnings have to be reported in your tax returns

You’ll need to pay tax after crowdfunding if backers obtain one thing of worth in alternate for pledging, which is mostly the case when elevating cash via reward-based crowdfunding. Crowdfunded cash obtained as a present is normally not thought of taxable earnings. Whenever you file your taxes, you need to be reporting all the earnings you made via 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 advocate that in case you’re a crowdfunding creator who has raised funds via Kickstarter, Indiegogo, or Crowdfunding by BackerKit, you converse to a tax skilled to make sure that you’re assembly your whole tax obligations. 

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

The crowdfunding platform you employ will ship a 1099-Okay kind 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 kind doesn’t inform the complete story about how a lot cash you, because the marketing campaign organizer, must report. Listed here are a few explanation why:

1. Even in case you don’t meet the thresholds for receiving the shape, you’re nonetheless required to report your crowdfunding earnings. 
2. In response to the Inside 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. Challenge transactions that have been generated exterior of Kickstarter or Indiegogo received’t be reported on the 1099-Okay that you just obtain from them, however you’ll nonetheless need to pay taxes on these funds.
4. A few of the cash included within the kind could also be tax-deductible. 

To see what your true taxable earnings is, it helps to get a breakdown of the cash you made. In the event you have been holding very clear information all through your marketing campaign about how your whole funds have been being allotted, you need to use that as a information. However in case you haven’t completed that, you don’t want to fret. With BackerKit Accounting Studies, you possibly can see all the cash you raised via Kickstarter or Indiegogo campaigns in addition to cash raised via 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 e-mail and placement, this report exhibits you the pledge degree value, pledge degree upgrades, add-on value, transport value, tax value and whole value for every backer. 

This report particulars the anticipated income on your backers in BackerKit, that means that is what your undertaking is anticipating to gather primarily based on the present backer knowledge (no matter survey completion) in BackerKit. The report will likely 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 transport prices are thought of taxable. In different states, transport prices aren’t taxable. With the Anticipated Income Report, you possibly can see which state cash is coming from and the way a lot of that cash is allotted for transport, so you possibly can decide if funds are taxable.

Resolve which accounting methodology you’re utilizing

There are two accounting strategies: accrual accounting and money foundation accounting. With the accrual methodology, you report income once you present items or companies. In the event you’re utilizing money foundation, nonetheless, you report income once 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 methodology you’re utilizing. In the event you’re utilizing the money methodology, and also you gather cash out of your backers throughout the 2020 tax yr, however received’t ship out rewards till later in 2021, you’ll need to report the cash in your 2020 tax returns. In the event you’re utilizing the accrual methodology, and also you gather cash throughout the 2020 tax yr, however don’t ship till the 2021 tax yr, you received’t need to report that earnings in your 2020 tax returns. As an alternative, you’ll report the earnings the next tax yr.

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

Whatever the methodology that you just’re utilizing, you’ll want to know when transactions occurred. To do that in BackerKit, you possibly can 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 will likely be listed within the part titled “platform_pledge.” The report shows the backer ID, backer e-mail, backer state, backer nation, transaction ID, transaction date, transaction quantity, and transaction supply.

Guaranteeing you come up with the money for to cowl taxes

Relating to paying taxes, nobody desires to dip into funds that weren’t already earmarked for that objective. As a creator, chances are you’ll want that cash to cowl different elements of your undertaking, like manufacturing prices. You may be sure to come up with the money for available to cowl your taxes by doing the next: 

1. Issue the taxes you’ll need to pay into your funding aim. You need to seek the advice of with an accountant and search for the federal tax charges to get an concept of what you’ll owe. 
2. Take a while to analysis the advantages of the accrual methodology of accounting. As talked about earlier, you might be able to write off bills that happen after you’ve collected cash out of your backers. This might relieve a few of your tax burden.
3. Gather further taxes in BackerKit. Utilizing the Tax Guidelines characteristic, you possibly can cost an extra share primarily based on the whole value of the backer’s pledge degree plus the price of any add-ons chosen in BackerKit (minus transport).

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

What about gross sales tax?

Relying on the place you’re situated, chances are you’ll must pay gross sales tax. Sometimes, crowdfunding creators will solely need to pay gross sales tax on transactions if they’ve a major connection to the placement of the backer. So in case you reside in California, you might have to pay gross sales tax on all the transactions from backers in California. 

To determine your gross sales tax obligation, you’ll need to establish the place backers are situated. 

Making an attempt to manually divide backers up by location may be difficult — particularly in case you have a lot of US and worldwide backers. One option to make this course of simpler is with BackerKit’s Segments software. Segments permit you to zero in on particular backer knowledge factors.

Use the software to separate up your backers into smaller teams primarily based on standards akin to location, the gadgets they bought, or pledge degree. 

Tax season may be aggravating. However once you’re ready, you possibly can face it with confidence. Contact our workforce to be taught extra about these BackerKit tax instruments and different options that may aid you keep organized and handle your crowdfunding campaigns. 

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

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