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in Hot Topics - 20 Aug, 2012
by Om - no comments
Crowdfunded businesses may be may be obliged to pay tax

Crowd funding is one of the most popular ways to raise funds for a project. And sites like Indiegogo Inc. and Kickstarter are the newest player in this category. They have been able to get high success in a short period of time. There are provisions in those sites to offer rewards to those who pledge. When the site Kickstarter was started in 2009, it was mainly used by musicians, film makers and other creative types in order to raise small sum of money for their projects. But as it started to grow, it has been used extensively and the dollars involved has also got bigger. Ouya is one of those eight companies who managed to raise at least $1 million through Kickstarter. It has been reported that the backers of Kickstarter has raised more than $300 million ever since it was launched and also incredible growth in the activities of Indiegogo Inc. was witnessed in this period.


But it was Murray Solomon, who is the tax partner at EisnerAmper accounting fund has stated that, “Crowdsourcing is becoming a popular way for start-ups to raise cash, and the companies that receive the cash may not realize the proceeds are taxable.” He also added that, “They may get a very unpleasant surprise when they build all their prototypes and spend all the money.” According to the conditions, if one manages to rise more than $20,000 from at least 200 people, then one is ought to fill the form 1099-K, courtesy of amazon payment, which is used to process the transaction in the site. On the other hand, Indiegogo Inc. has made it clear in their terms and conditions that “users shall have full responsibility for applicable taxes on their projects’ funding.” However both of these site declined to talk on tax issues.


The condition when one is subjected under tax is when someone is selling or rewarding something. For an example, if a company is developing some sort of device and those who donates money gets the product, may it be a prototype then it is taxable. It is taxable because one is getting something in return which is more like selling product. And there are certain situations when one is exempted from tax. For example, in case of gift donation as well as charity it is not taxable. Much talk is going on among accountants to differentiate the line between conditions which are taxable and which are not. However, with clear differentiation, tax might be imposed in certain cases of crowd funding.