Fundraising

What is the one thing you need if you plan to record an album, shoot a film, go on tour, or embark on any other creative venture? No, you don’t necessarily need an idea[1]. You need money.

Unless you are independently wealthy, have diligently invested, or own a goose that lays golden eggs, you’ll need to fundraise to jumpstart your venture. You may have some experience with fundraising, but may not necessarily be familiar with the diverse and complex tax implications of fundraising. (The tax considerations of owning a golden goose are also complex. If you happen to own one, please call me.)

Loans:

You may be able to fundraise through accepting loans. The loan principal, i.e. the amount you receive from a loan is not taxable to you. Assuming your purpose for taking the loan is a trade or business, the interest you pay on the loan may be deductible and may be available to offset taxable income.

Equity Investments:

An investor may offer funding in exchange for a stake in your project or entity. Such a fundraising method would be an equity investment. The amount you receive from an equity investment generally is not taxable.

Choice of an entity may be crucially important when it comes to accepting equity investments and how they are treated for tax purposes. Sometimes loans and equity investments can look alike and are hard to distinguish from each other. Please speak to a tax professional if you find yourself in an unclear situation.

Find a Box of Money:

Had Steven Spielberg never found a box of cold hard cash in the bathroom of the Museum of Natural History, the world may have never known Jurassic Park.

Gifts:

Nana loves you and wants you to pursue your passion, right? If so, she may gift you funds. A gift is not subject to income tax liability by the gift recipient, but may be subject to gift tax by the gift giver.

A gift is made out of detached and disinterested generosity. If the gift giver expects something in return, then sorry, it’s probably not a gift and it may be subject to tax.

Grants:

Several universities and other organizations may offer grants to filmmakers or for other creative endeavors. Unfortunately, unless the grant is obtained in pursuit of a higher education degree, the proceeds will be subject to income tax. The recipient will likely incur deductible expenses that may ultimately offset the income from the grant.

Bake Sale:

If you’re contemplating doing a bake sale, you’re not ready to be reading tax blogs.

Crowdfunding:

You are probably familiar with crowdfunding sites like Kickstarter and IndieGoGo. Crowdfunding sites are a tribute to modern technology. Movies like Wish I Was Here, Veronica Mars, and SuperTroopers 2 have raised millions thanks to the interest and funding from fans. Big budget albums and video games have been created through crowdfunding. And most impressively, some dude raised $50,000 to make Potato Salad!!! KickStarter-Potato Salad

As far as tax considerations go, it has not yet been decided how crowdfunding should be treated. Some say it is income, some say it’s a gift, some say it’s a mixture of both. The IRS has not issued any guidance on this issue, and until it does, no one will know how to correctly treat it. Kickstarter has advised that it will issue a 1099-K if a site user raises more than $20,000 and receives more than 100 contributions. For now, take care and discuss with your tax advisor how you should treat crowdfunding.

Now you know something about the taxation of fundraising. If you care to share a creative way you’ve thought of to raise money, leave it below.

– Alex

[1] If you’ve ever seen a Michael Bay movie, you know an idea is not required to make a movie.

About WithumSmith+Brown, PC

WithumSmith+Brown, PC is a full service, regional certified public accounting and consulting firm with over 900 employees.
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