Crowdfunding has become a popular way to raise money for a new venture. New legislation has created certain exemptions for crowdfunding from SEC registration requirements which has increased the ability of startups to use this option to obtain financing. However you might be surprised by the tax treatment of crowdfunded contributions to your business. Since some of the crowdfunding schemes don’t create actual debt or a equity in your business, the IRS has concluded that such contributions are just a source of income. Income which is subject to tax.
The IRS guidance specifically states that crowdfunding revenues generally are includible in income if they are not
- loans that must be repaid,
- capital contributed to an entity in exchange for an equity interest in the entity,
- gifts made out of detached generosity and without any “quid pro quo.”
The IRS goes on to point out, that crowdfunding revenues must generally be included in income to the extent they are received for services rendered or are gains from the sale of property.
In the case you are participating in a crowdfunding program that creates an actual equity interest or a boni fide debt in your business, then you should be able to avoid the taxable income trap. Of course that means you now have real investors or lenders you have to be responsible for paying back.