crowdfunding platforms like Kickstarter, opening a whole new world in financing companies, but may end up being a confusing world for tax purposes. The product is not as sales in the traditional sense, and people who contribute are not shareholders. So how should you handle the revenues of a project of crowdfunding?
It is important to report income properly crowdfunding or the IRS is likely to ensure that you do.
This is what you need to know to stay out of trouble with the IRS - and other tax authorities
crowdfunding product returned taxable
Generally crowdfunding product must be declared as income in the year .. you receive them, or they are constructively available.
If you use the accrual method, you report income when you win, when it is due to you or when you receive it, whichever comes first.
Using the method of accounting does not allow you to defer revenue recognition you received.
Some people argue product crowdfunding are gifts. However, if you do not know the people to contribute and they receive something of value in return, this will be a difficult argument.
Most crowdfunding deals offer larger objects in exchange for greater "gifts", which makes the gift even less tenable argument.
But there may be some situations where crowdfunding can be considered a gift. Although, people rarely make gifts to for-profit companies, so if you want to assert the product was a gift, you will need to make a convincing case.
Moreover, if the product was indeed gifts, donors are responsible for all gift returns.
you might have sales tax and state tax revenue.
If you accept crowdfunding product of the state you operate in, and that the state has a sales tax, you may need to replace the sales tax.
The same goes for income tax. Check with your state to be sure.
You can deduct expenses from income.
A company that uses crowdfunding is still a business like any other in respect of taxes. You declare the income and offset this with the charges.
If you raised the amount of money you expect to spend on product development, and you spent exactly that, your net income from this activity should be close to zero.
you can even have a deductible business loss if your expenses exceed your income.
you may be able to deduct start-up costs of the year you paid them.
Some investigation costs on the creation of a business or real start-up costs for a new business are usually not deductible in the year you paid them.
for example, spending by market research, advertising a business opening, legal and other professional services and employee training before the business starts are considered start-up costs . Most expenses you pay before the day of your open business are start-up costs.
Although start-up costs are generally regarded as capital expenditure and therefore amortized over 180 months, the IRS allows you to deduct up to $ for the year 5000 the business starts.
this $ 5000 is reduced dollar for dollar by your cumulative start-up costs of over $ 50,000.
additional costs that are not startup costs include taxes, interest and costs of research and development.
expenses for research and development deserve special tax treatment.
costs of research and experimentation are usually your spending to develop or improve a product. You can choose to amortize the costs of research and development over 10 years, or deduct them in the year you are in charge.
Research and experimental costs do not include items such as consumer surveys or advertising. Rather, they include costs related to the invention, patents, pilot models etc.
Beware crowdfunding to raise product later this year.
What happens if you raise a ton of income Kickstarter end the year, but did not have significant commercial costs until the following year
response :. you just made a taxable income
the problem: you can not report the income to the following year, you can deduct expenses for early next year.
Your income and expenses are in different years, which could be a fiscal disaster. Your taxable income without compensation expense could push you into a tax bracket higher income, and the resulting tax could take much of the money you expect to use for your project.
The following year, if you have large business expenses, but little or no business income, you may have a deductible loss of business. According to the rest of your overall tax picture, this can do for your significant tax bill the first year.
The best advice is to avoid such a scenario. Make sure to plan crowdfunding projects so that you receive a product early in the year that you can match most of your expenses to your income.
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