Crowdfunding and Taxes: What Donors and Recipients Need to Know
Crowdfunding has become a popular way to raise funds for particular causes, but donors and recipients should be aware of the tax requirements involved.
In crowdfunding, typically, a third party raises funds for a charity or cause through their internet platform and then distributes the contributions back to the charity or recipient, less a fee. It is commonly used to raise funds to help those stricken by tragedy or a larger charitable cause. For example, GofundMe offers a campaign to donate to relief efforts in Ukraine and another to help Sacramento shooting victims.
So what does all of this mean for crowdfunding donors and recipients?
There are a variety of crowdfunding platforms on the internet, each offering different fundraising services and models. Some platforms charge a percentage fee and others charge a monthly fee. Some also provide additional donor management and other services. The two most common models for nonprofit organizations are the donor-based model and the reward-based model.
With the donor-based model, the donor receives nothing in return for their donation. The donation is in the nature of a gift, and provided the recipient is a 501(c)(3) charity, a charitable donation deduction should be allowed for the full amount (unless other limitations apply). We assume throughout this article that the funded project is a charitable project and not an unrelated trade or business. Organizations should never use crowdfunding for a business unrelated to its exempt purpose.
In the rewards-based model, the donor receives something in exchange for their donation – sometimes something small like a t-shirt and sometimes something of greater value, like entering a raffle with a valuable prize. In the rewards-based model, the facts should be examined to determine whether what the donor receives is de minimis or something of value (usually called consideration), making part or all of the transaction an exchange rather than a gift. . This is important because the donor generally expects a full charitable deduction.
To determine whether the value the donor receives is de minimis, we look at the general charitable donation rules regarding consideration transactions. There are two tests to determine if the value the donor receives can be ignored:
- The value the donor receives is 2% or less of the payment, and the value does not exceed $117 in 2022 (this is indexed for inflation), or
- The payment is at least $58.50 and the donor received a low-cost item with the donee’s logo that costs less than $11.70 in 2022 (indexed to inflation).
If the value is not ignored, the charitable deduction is the amount of the gift that is greater than the fair market value of the advantage the donor received.
501(c)(3) versus individual contributions
Another important factor in donor deductions is whether the funds are intended for a 501(c)(3) exempt charity or for specific individuals, such as in the case of a campaign to fund medical expenses. a person, for example. If it is intended for individuals, the donor will not be entitled to a charitable donation deduction. If the recipient is a 501(c)(3) qualifying charity, the donor must qualify for a charitable contribution deduction.
If the charity does not have an IRS determination of exemption under section 501(c)(3), then it could use a fiscal sponsor.
Tax sponsors are 501(c)(3) exempt organizations that raise funds for non-exempt organizations, with the intent that the donations be deductible as charitable contribution deductions. Fiscal sponsors must take control of donated funds and maintain discretion over their use. The allocation of funds to the non-exempt organization will not result in any deductions for the donor. However, the use of donated funds for specific charitable purposes can be restricted.
Fiscal sponsorship is very complex and beyond the scope of this article. Such arrangements should be carefully put in place with the assistance of professional legal and tax advisers.
Donor acknowledgment receipts
Donor acknowledgments are also required if the gift is $250 or more, or more than $75 if goods or services were provided to the donor in exchange for the contribution. In some cases, the third-party crowdfunding platform will provide the receipts. The charity must ensure that this is done correctly, regardless of who issues the receipts. If there is a fiscal sponsor, then the fiscal sponsor will generally issue receipts.
Another question is whether the fees charged by the crowdfunding platform are part of the contribution. Even if the charity receives less than the total contribution, it should record the total contribution as revenue and the charges as a fundraising expense. For example, if the donor donated $100 and the crowdfunder keeps $5 and distributes $95 to the charity, then the charity would record a donation of $100 and a fundraising expense of 5 $. It also provides more transparency to anyone viewing the organization’s financial statements regarding fundraising costs.
Organizations should be aware that crowdfunding is wide-reaching and will likely attract donors from many states.
Most states have charitable solicitation registration requirements, and each state’s requirement is a little different. Organizations should investigate each state’s requirements and determine what registrations may be required. Fundraising through a crowdfunding platform may be considered a “solicitation” in various states, which would require registration.
Who should file is also a question. A state attorney may be the crowdfunding platform and not the beneficiary charity. If a fiscal sponsor is used, they may need to register. Additionally, the crowdfunding platform may need to register as a professional fundraiser in various states.
Professional firms that specialize in state charitable filings can help determine the requirements of the situation. Even if the initial crowdfunding activity is not considered a solicitation in some states, it could lead to a future solicitation that would require registration. For example, if the crowdfunding platform provides the charity with a list of donors and the charity solicits those donors in the future, it may need to register in the Donor States before doing so.
Reporting to the IRS
Finally, third-party fundraisers may be required to report distributions of funds raised to the IRS on a Form 1099-K and provide a copy to the recipient of the funds. Form 1099-K is not required if contributors to the crowdfunding campaign do not receive goods or services for their contributions. Therefore, this would only apply to the rewards model. The reporting threshold is a payment over $600.
Crowdfunding can be a great opportunity to reach previously untapped donors, as well as a quick and convenient way for donors to make contributions. However, organizations considering a crowdfunding campaign should consult a trusted tax professional for information and advice before engaging in the campaign and regarding the reporting of funds received from it.
If you have any questions about your crowdfunding campaign and its tax implications, please email us.
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