Mullins: Crowdfunding and taxes

Josh Mullins - The Journal Record

Nov 7, 2022

In today’s digital environment, a new way to raise money

In today’s digital environment a new way to raise money, create revenue channels or find opportunities to be generous has become more normal. That new method is called crowdfunding.

Crowdfunding has opened the doors for many people to be a part of raising capital for businesses, getting to buy-in to new products before those products have been released, or just helping people in need. It has allowed people to become a part of something that has never been accessible before.

However, in many instances these opportunities come with a tax hook you weren’t looking for. First, as a business owner, whether for profit or not, after Dec. 31, 2021, the IRS reporting rules changed and if you received funds of more than $600 in gross payments for goods or services, you should expect to receive a 1099-K. The IRS also will receive copies of these forms, so they will have record of your crowdfunding activities. If you, as a business, have provided any types of goods or services for the funds you have received through your crowdfunding campaigns, those funds are considered taxable income and you should report those in your gross income numbers.

Another reason some businesses are providing crowdfunding opportunities are to raise capital. Funds received for this generally aren’t taxable as income but do create different entity structure concerns.

If you were the sole owner of an entity and you receive funds for capital reasons, you now have a multi-member entity type and may need to file a different type of tax return if you aren’t a C-Corporation.

If you are filing as a partnership, you will need to understand the income tax filing requirements for each new partner you have admitted. If you were an S-Corporation, you need to keep in mind that S-Corporations have limitations on the type and number of owners they can have along with the restriction on the type of stock they can issue. You also will need to keep detailed records on these types of transactions to correctly report your income tax returns to each owner of your business and the effective date of each new owner.

While crowdfunding can open the door for people and businesses alike, keep in mind that comes with the responsibility of correctly reporting this activity for tax purposes as well.

Josh Mullins, CPA, is a partner at Arledge, an Edmond-based public accounting firm.