By Joe Burwick, CPA
Crowdfunding is not a new concept, as grassroots fundraising dates back to 1997. But with new platforms, like that of IndieGoGo and Kickstarter, crowdfunding has gained traction in raising revenues for donations, charities, and businesses.
What types are there?
Crowdfunding relies on the concept of asking large groups of organizations and individuals, to contribute to a project. There are three primary types of crowdfunding:
Donation or Reward. When people give money towards a project and receive a gift or promise of one of the finished products in return.
Debt. Receiving funding from people with the expectation they will be paid back with interest in the future.
Equity. This involves getting a large number of people to buy into an idea in return for equity in the project or business.
Depending on the structure of the transaction (Equity, Debt, or Donation/Reward) there are differing tax implications and reporting requirements. For instance, donations/rewards where the investor receives something in return is a taxable event and must be included in gross receipts. However, if deductible business expenses exceed your crowdfunding revenue and other operating revenue, then you won’t owe income tax (but may owe franchise or minimum taxes).
Depending on how the payments are received, the crowdfunding recipient may get Form 1099-K. If payments are made by credit card or if payment in settlement of third party network transactions (i.e. PayPal) where gross payments exceed $20,000 and there are more than 200 transactions, you may receive one of these forms. The IRS will look to match (and analyze) the income on your return to Form 1099-K you receive.
In response to the growing popularity of Crowdfunding, the JOBS act set the Crowdfunding exemption for equity interest offered to the public at a ceiling of $1,000,000 for the aggregate amount sold to all investors in a twelve month period. Prior to this act you had to either register with the SEC or meet another exception before offering securities to the public.
The act further limits the amount sold to any individual investor based upon their annual income or net worth as follows:
If annual income or net worth is less than $100,000; the aggregate amount sold to such investor cannot exceed $2,000 or 5 percent of net worth / annual income.
If annual income or net worth is greater than $100,000 the aggregate amount sold to such investor cannot exceed ten percent of the annual income or net worth of the investor (not to exceed a maximum aggregate amount of $100,000).
You should consult a tax advisor to determine if the amounts received can be excluded from income (i.e. under Internal Revenue Code Section 118 for a Corporation).
What are the Financial Reporting Requirements?
Not only are there potential tax implications to these equity investments, but you must meet various financial reporting requirements as well. Here is what you have to know to meet the financial condition requirements clause of the JOBS act:
Different offering amounts have different SEC financial reporting standards. Congress has set forth the standards as follows:
If the target offering is $100,000 or less, the most recently completed income tax return and financial statements certified by the principal executive officer of the issuer must be provided.
If the target offering is more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant independent of the issuer must be provided.
If the target offering is $500,000 or more, audited financial statements reviewed by a public accountant independent of the issuer must be provided.
As new provisions of the JOBS Act are rolled out, it seems to have raised more questions than answers for entrepreneurs and online start ups. While the bill was designed to help companies tap investors for the early cash they need to get established and hire workers, easing federal requirements for completing private share offerings; a young company would then be bound by SEC rules protecting the rights of their new stockholders, as well as certain state laws.
Don’t expect state security regulators to ease up anytime soon. As crowdfunding gains traction (and the dollars associated with it grow), so too will the scrutinizing of start-ups that issue shares through crowdfunding. Due to the complexities of parts of the JOBS Act and SEC rules toward crowdfunding, entrepreneurs should talk to a tax consultant; to be aware of all the state and federal regulations and the impact it may have at tax time.
Freed Maxick CPAs
Freed Maxick tax auditors will keep you up to date on the most pressing tax issues. If you would like to know how crowdfunding may affect your business at tax time Contact us and connect with our experts.
Ever hear the saying “there’s an app for that”; well now there’s a currency for online users-Bitcoin. With no actual existence in the physical world, Bitcoin has been breaking barriers for online and consumer bartering.
How does it work?
By visiting an online exchange site, you can simply exchange traditional curriences (dollars, pounds, etc) for the virtual currency. Trading started at $7.00 in 2010, in exchange for one Bitcoin. What separates the Bitcoins from other tradable scripts (i.e. the Disney dollar), is that the coins trade on a floating exchange rather than having a fixed exchange rate set to a national currency. Prices have fluctuated wildly over the last couple of years, and with no government oversight or regulation, there is also no way to protect the online exchange. This led to a brief shutdown after Bitcoin sites were hacked. It is back in circulation, but finding places that will take the coin is difficult. There are some restaurants, book stores and online retailers that will take the coin as currency. It requires logging into your IPhone and sending the coins to the retailer you are dealing with, virtually. Once the exchange is complete, you have your merchandise. According to Bitcoin Magazine, the currency has gained over 1 million users.
It can’t be that easy?
It’s not! When Bitcoin first started trading in 2009 it sold for less than a dollar. The virtual currency started garnering more attention when, in the start of January of this year, it rose from $10.00 to roughly $260.00 by April 10th. But that bubble burst when it fell to $77.00; since then it is slowly rising again. Not only is the currency volatile, but investors have had to deal with highly unstable trading platforms- the unfortunate symptom of decentralized currency. Currently there are 11 million Bitcoins in circulation, but this new way of bartering is unpredictable. Traditional currencies are safely held in a range of investment funds and banks. While both have their security problems, only one is considered “hard currency”.
Are there tax implications?
Due to widespread curiosity and the growing interest in Bitcoins, the Treasury Department issued a series of guidelines for Bitcoin brokers. The guidelines serve more as a direction against money laundering than tax implications. The IRS hasn’t specified yet whether Bitcoins should be considered an in-kind payment, bartering system, or foreign currency payment. Trying to decipher between these distinctions is no easy task, as each has its own implications under the U.S. tax code. As the continued education is necessary, to be aware of future tax issues that may arise from internet currencies; as the IRS and government entities move toward concrete answers to questions surrounding the treatment of digital currencies.
Freed Maxick tax auditors stay current and update with currency guidelines, to help keep you aware of issues or implications that could affect your taxes. If you would like to learn more Contact us to connect with our experts.
We have also worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors about getting your high tech company to growth mode. Call us at 716.847.2651, or contact us here.