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Tax Law (Questions About Taxes)/Paying tax on money raised through crowdfunding

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Question
Hello Mr Itani,

Thank you very much for volunteering on this site. I am wondering if you could give me your advice on the following situation.
I want to raise money on Kickstarter, the crowdfunding website that allows people to pledge small amounts towards a project in exchange for rewards (not equity). In my case, I am asking people to pledge money for the development of an electrical device which they will then receive when the development has been completed. The money I hope to raise will be used for development and manufacturing of my devices, and I would like an expert's opinion on my possible tax obligations. Can I treat the money raised through Kickstarter as revenue, and then treat the money left over after development and manufacturing costs have been paid as the taxable profit? I have heard talk of the total amount raised through crowdfunding being treated as taxable income. The money is being raised as an individual, rather than a company - would that make any difference?

Thanks for reading my question and best regards,
Eddie

Answer
Dear Eddie,

Thank you for such a relevant and timely question, and best of luck on your development of your device.

In answering your question we have to understand what is considered income in the eyes of the Internal Revenue Code (IRC). The IRC does not list what is income, rather it defines income by exclusion. Every revenue stream is income unless it is specifically excluded by the code. (An example of the exclusions: is life insurance payout upon death of the insured).

I think the confusion is happening in proper labeling to the terms used. Whether you are a single member operating as a proprietorship or a corporation the economical stream in cash and cash equivalents would be called Revenue. You can offset against that revenue all expenses that is necessarily for you to conduct your business and what is left from the revenue will be considered Net Income, and you would have to pay income tax on that (federal, state and local if applicable).

However; since you are developing a device your situation might not be as straight forward. When an entity/person is involved in developing products, medicine, their is Research and Development(R&D) issues that need to addressed. Some of the R&D expenditures need to be capitalized and amortized over certain number of years. I would certainly encourage to seek the help of a local CPA to discuss these issues with you before jumping into this process.

I hope that I have answered your question, and please do not forget to rate my answer.

Regards,
Abraham Itani, CPA
www.itanitax.com
973-553-2250  

Tax Law (Questions About Taxes)

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ABRAHAM ITANI, CPA

Expertise

TAX QUESTIONS DOMESTIC AND INTERNATIONAL OUTBOUND AND INBOUND. FBAR COMPLIANCE. CORPORATE, PERSONAL, PARTNERSHIP, PASS TROUGH ENTITIES, S-CORPORATION, LLC, TRUST, GIFT TAX, 1120, 1040, LATE FILING, NON FILING, AMT, FTC.

Experience

MORE THAN 10 YEARS OF STATE AUDIT TAXATION, MORE THAN 10 YEARS OF PRIVATE AND PUBLIC TAX EXPERIENCE WITH ITANI ACCOUNTING AND TAX, KPMG AND MNP. DEALING WITH HIGH NET WEALTH INDIVIDUALS, LARGE PARTNERSHIPS, EXPAT., CFC AND PFIC. DEALING WITH TAXING AUTHORITY ON ISSUES OF NON FILINGS AND LATE FILINGS.

Organizations
MEMBER OF AICPA, AND NJSCPA.

Education/Credentials
CERTIFIED PUBLIC ACCOUNTANT IN NEW JERSEY AND COLORADO.

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