Crowdfunding and Business Taxes

You may think crowdfunding for your business is a rookie way to raise funding. 

Don’t tell that to Oculus VR founder Palmer Luckey, who crowdfunded $2.4 million in 2012 and sold the business to Meta for $2.3 billion (yes, billion with a “b”) less than two years later.  

Oculus VR is not the only business that has successfully used crowdfunding. Flow Hive, Monzo, Coolest Cooler, and Go Cycle. 

Getting more interested? Great, because in this post, we’ll explore different types of crowdfunding, how to report income, tax tips, and some common tax mistakes to avoid. 

Let’s go! 

Types of crowdfunding

The first, and most least likely for a more established business, is donation-based crowdfunding. It’s exactly what it sounds like: supporters contribute without expecting anything in return. 

Donations may qualify as a gift, but if not, then it’s still taxable income for the business. 

The next is reward-based crowdfunding. This one was popular in the early days of crowdfunding. Basically, the contributor doesn’t get any equity in the business, but they do get a little perk. 

For example, if the business is a SAAS company, the contributor may get early access to the product for free.  This is still considered an exchange of money for service, so it is taxable income. 

The most common one these days is equity-based crowdfunding. There are multiple platforms that support this type, but they all require contributors to receive some degree of ownership. 

Equity-based crowdfunding may be subject to securities regulations, and investment income may be taxed. These platforms are more suitable for newer companies and tend to attract investors who are risk-takers. 

The final and most common for established businesses is debt-based crowdfunding. It isn’t uncommon for more established businesses to use these platforms because they don’t give up any equity in the business.  

Like any loan, the business simply agrees to repay the lender a set interest rate in a certain amount of time.  But instead of only paying one lender, the business may be repaying dozens or even hundreds of them. 

Unlike the other forms of crowdfunding, the revenue generated is not taxable, and the interest is tax-deductible. 

Crowdfunding reporting requirements

If you use any of the first three crowdfunding techniques, the platform will issue you a Form 1099-K, provided the campaign raised more than $600. 

If you receive a 1099-K, you must report the amount on your tax return, even if part of the funds isn’t taxable.

There’s no requirement for debt-based crowdfunding unless there is a loan default. In that case, the forgiven amount may be treated as Cancellation of Debt (COD) Income and could be taxable.

There are exceptions for bankruptcy or insolvency, but that’s a discussion for another blog post. 

The common denominator among all these is recordkeeping. It will have to be impeccable, so getting a CPA involved at the beginning for insight and guidance in this area is a wise move. 

Getting a CPA involved early may also help with this next section. 

Avoiding common mistakes in crowdfunding

As unique as crowdfunding may be for raising revenue, it still carries the chance of common mistakes associated with other types of funding. 

Confusing taxable income with non-taxable gifts is near the top of the list, especially for donation-based crowdfunding. 

Also, overlooking tax obligations when contributors come from multiple states can be problematic. 

Failing to report in-kind contributions or non-monetary rewards, like business equipment, is another common mistake. 

The Bottom Line

Crowdfunding may not be the most common way to raise business funding, but it has become more mainstream. 

However, if you decide to try crowdfunding, get a tax professional involved early to create a plan and strategy that keeps your efforts from backfiring.