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How do you account for startup funds you raise through crowdsourcing?

Jennifer Escalona Dunn
posted this on Feb 13 11:06 am

We recently posted this awesome article by Thursday Bram on the Outright Blog. http://outright.com/blog/accounting-for-crowd-funding-what-you-need...  It's all about how many small businesses are now raising money through crowdfunding sites like Kickstarter, but it also talks about how tax law hasn't really caught up with this income source. As an accountant or financial pro, how would YOU advise your clients to account for funds they raise through crowdfunding? 

 

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Wray Rives, CPA CGMA

I think Thursday hit it right on with her post.  Just because you have a creative job does not mean the IRS does not consider it a real job and any funds you receive would most likely be considered taxable income.  In fact Kickstarter specifically prohibits the project owner from offering financial incentive to the funders such as ownership or opportunity to share in any profit.  The creator is supposed to offer rewards to the funders, which would be considered a legitimate business expense.

As mentioned in the post, setting up a non-profit is certainly an option, if the creative project qualifies.  You do however need to be careful that 1. Your project really qualifies as a charitable endeavor under IRS rules and 2. You need to comply with Kickstarter's prohibition against funding "causes".  Assuming you can overcome those two hurdles, you should also be aware that any money a creator takes out to cover their own personal expenses, as opposed to expenses directly related to the project, would probably still be considered income to the creator.

February 24, 2012 07:46 am