ARM is pleased to announce the promotion of Carrie Hoover to audit senior. Carrie is a graduate of Ohio Dominican University and has been with the firm for two and a half years.
Crowdfunding is a way for businesses and entrepreneurs to solicit online contributions from multiple parties. This is typically accomplished through a crowdfunding platform such as Kickstarter (www.kickstarter.com) or AngelList (www.angel.co). Depending on the program, participants may receive “rewards” for their contributions. These are usually items of nominal value such as t-shirts or concert tickets. In some circumstances, contributors may receive an equity interest in the business or a right to have their contribution repaid with interest.Initially, crowdfunding was used primarily by musicians and filmmakers to fund projects that were unlikely to yield a profit. However, following the enactment of Title III of the Jumpstart Our Business Startups (JOBS) Act in 2012, the practice has expanded to a variety of industries. Title III created a federal exemption under the securities laws to permit companies to offer and sell securities through crowdfunding. Since that time, crowdfunding platforms have grown considerably, generating billions in capital for startups and small businesses.
As a general proposition, crowdfunding contributions are includible in income under IRC Sec. 61. This includes contributions constructively received by a company. However, depending on how the arrangement is structured, contributions may fall into one of the income exclusions provided by the Code. Accordingly, contributions characterized as loans, gifts, or capital contributions may be excluded.Loans. Crowdfunding contributions structured as loans are generally excludable from income. However, the arrangement should have sufficient debt-like features, such as an unconditional promise to pay, a fixed interest rate, and a specified maturity date. Arrangements where repayment depends on the financial success of the company or a particular project may be questioned by the IRS. Funds transferred without a bona fide repayment obligation will be includible in the recipient’s income, even if the parties characterize the deal as a loan.
Gifts. Crowdfunding contributions constituting gifts for federal tax purposes are excluded from the recipient’s income under IRC Sec. 102 . Gifts generally proceed from a “detached and disinterested generosity.” Therefore, quid pro quo contributions in which the donor receives an economic benefit will not qualify as gifts.
Observation: Some crowdfunding platforms offer “rewards” in exchange for contributions. It is uncertain whether receipt of a reward negates an individual’s donative intent, especially when the item’s value is inconsequential. Although not directly on point, the IRS’s guidelines on quid pro quo charitable donations (which aren’t deductible) may be helpful. According to Rev. Proc. 2015-53, a benefit is de minimis and charitable contributions are fully deductible if the value of all benefits received by the donor is not more than 2% of the contribution, or $106 for 2016, whichever is less. In addition, if the contribution is at least $53 for 2016, and the donor receives token benefits costing no more than $10.60, the benefit is de minimis and the contribution will be fully deductible. Presumably, similarly de minimis rewards would not negate the donative intent for crowdfunding purposes.
If the contribution is a gift, the donor may be subject to gift tax depending on the amount of the contribution. Currently, there is an annual gift tax exclusion of $14,000 per person. Given that crowdfunding platforms generally attract multiple investors with often limited resources, it is likely that most participants will not pay gift tax.
Capital Contributions. The taxability of funds characterized as capital contributions generally depends on the tax classification of the business and whether the donor receives an equity interest. In the case of a corporation, gross income does not include any contribution to its capital. If the donor receives stock as part of the deal, the corporation recognizes no gain or loss on the receipt of cash or other property. However, the donor may have to recognize gain if he contributes appreciated property to the corporation and does not own at least 80% of the entity following the transaction. This scenario is unlikely, however, because crowdfunding platforms generally support cash transactions only.
If the business is classified as a partnership for tax purposes, and the donor receives an equity interest as part of the deal, crowdfunding contributions are generally tax-free to both the entity and the donor. Capital contributions to a partnership by nonowners, however, are generally includible in income.
Crowdfunding expenses commonly include service fees charged by the platform tasked with raising the funds. For example, Kickstarter charges a 5% fee if the project is successfully funded. There are also legal fees and other expenses, such as the rewards offered to contributors.As crowdfunding is typically associated with startup companies, some question whether such initiatives rise to the level of a trade or business under IRC Sec. 162(a). This stems from the fact that many projects are pursued with no reasonable expectation of profit. For businesses lacking a sufficient profit motive, crowdfunding expenses will be subject to the Section 183 hobby loss limitations.
Companies meeting the definition of an active trade or business will be allowed to deduct all ordinary and necessary expenses, including crowdfunding expenses. However, startup expenses are not immediately deductible. The taxpayer may elect to deduct up to $5,000 of these costs, but this is reduced by the amount by which total startup expenditures exceed $50,000 [IRC Sec. 195(b)(1) ]. Any startup costs remaining may be amortized ratably over 15 years.
Crowdfunding participants may wonder if contributions are reported to the IRS. In general, payment settlement entities are required by IRC Sec. 6050W to annually report the gross amount of payments made in settlement of credit card, debit card, and other payment card transactions on Form 1099-K. Transactions handled by third-party payers, such as crowdfunding platforms, may be exempt from filing Form 1099-K if the payments to the payee are under $20,000 or there are fewer than 200 transactions with the payee within the calendar year.Observation: As a practical matter, many crowdfunding platforms will be exempt from reporting requirements. However, some crowdfunding websites publicize contribution amounts for a particular project and may disclose the names of contributors as well.
In Information Letter 2016-0036, the IRS examined the tax consequences of crowdfunding. As is common with Information Letters, the facts have been redacted. However, it appears the taxpayer received crowdfunding contributions to purchase a company. Aside from the taxability of the contributions, the taxpayer questioned the applicability of the constructive receipt doctrine because funds may have to be returned to participants.As you would expect, the IRS concluded that the tax consequences of a crowdfunding effort depend on all the facts and circumstances surrounding that effort. In general, revenues from crowdfunding are includible in income unless they constitute loans, capital contributions in exchange for equity interests, or gifts. (The IRS clarified that a voluntary transfer without a quid pro quo is not necessarily a gift for federal income tax purposes.) In addition, crowdfunding revenues are taxable if they are received for services rendered or represent gains from property sales. In the end, the IRS looked to general principles of income inclusion to arrive at a somewhat vague conclusion.
Founded in 2008, Airbnb is a marketplace for people to list and rent unique accommodations around the world. It has grown in popularity over the last few years and presents many tax reporting questions for hosts who are earning money from renting out their homes. Here are some tips for reporting income from Airbnb.
First and foremost, hosts should keep detailed records of all income and expenses. This will be helpful not only for you and your tax preparer, but vital in the case of an IRS audit. Some typical expenses that a host may incur would include advertising, cleaning and maintenance, utilities, home owner’s insurance, property taxes and interest on loans and mortgages. You should not rely on Airbnb to issue you a tax form for your income earned. Airbnb only issues 1099s if someone meets one of the following criteria:
- US persons who have earned over $20,000 and had 200+ reservations
- Non-US persons who have submitted a Form W-8
- Hosts that had funds withheld from their payouts for taxes
It is also important to note that owners might not have to report any Airbnb income on their tax forms at all if their residences are rented out for fewer than 15 days per year. This has become popular for events where hotel rooms might not be available, like in Dublin, Ohio during the Memorial Tournament or Cleveland, Ohio during the Republican National Convention.
As always, consult your tax advisor with any questions you have about reporting Airbnb or any other rental income.
If you were fortunate enough to be able to save money to pay for your child’s college education AND they ended up receiving scholarships to put toward that education, you may be wondering what to do with that excess cash in your 529 account. Luckily for you, there are some special rules pertaining to scholarships that may apply and save you from paying additional tax.
Typically, you would owe income taxes and a 10% penalty on distributions that are not used for qualified education expenses, however, you may withdraw money up to the amount of the scholarship that your child received and only pay tax on the earnings that your original investment made.
Here are some additional alternatives for handling your excess funds:
- Pay for qualified expenses other than tuition (room and board, books, and other mandatory fees).
- If your child ends up pursuing further education, like graduate school for example, you can put the funds toward that tuition.
- Switch the beneficiary of the account to another family member who can use the funds toward their college education in the future.
Be sure to consult your tax preparer or 529 plan administrator for additional tax planning tips related to your 529 plan.