How Can Crowdfunding Creators Prepare for Tax Day?

Introduction

There are many ways to prepare for tax day as a crowdfunding creators. Firstly, you should gather your receipts and expenses to deduct them from your income. You can also claim a special tax on the funds you raise through crowdfunders. This will allow you to avoid paying taxes twice. Another thing you should do is to prepare your taxes accordingly, so you do not have to worry about any tax debts on tax day.

Some treat crowdfunding revenue as a gift

There are also a number of tricky aspects that you should know. The first thing you should keep in mind is that you’re likely to be able to split the contributions into a gift and sale. If your charity sells your campaign at a price higher than the market value, you can claim the difference as a gift. This will make the process easier. Besides, a qualified online accounting service will help you manage receipts and commissionable sales. The software will help you file appropriate reports and forms. Be aware that this article is not legal or tax advice. The laws and regulations change frequently.

Use an online crowdfunding application

O-Bless is one of the popular crowdfunding platform developed by ONPASSIVE. It lets you join either as a benefactor or campaigner. Its multifaceted features helps you track your contributions, manage receipts and commissionable sales, and file the proper forms and reports. 

The crowdfunding contribution may be split into a gift and sale. 

Suppose the charity sells a product for above the market value. In that case, the difference between the two becomes a sale, and the remainder is a donation. A good way to determine what is deductible and what does not depend on the type of crowdfunding you’re doing. For the most accurate deductions, your crowdfunding accountant will help you calculate your income and expenses.

Organize your crowdfunding campaign to avoid any tax problems

Once you have collected your money, you must file your income taxes. For instance, you will need to file a Form 1099-K if you are using crowdfunding as a business. If you’re using crowdfunding to raise money, be sure to check your state laws and consult a qualified accountant before starting your project.

Before starting your crowdfunding campaign, you should identify your backers

The best way to do this is to determine where your backers are located. You should also consider your crowdfunding business’s tax status. In this way, you can prepare for tax day and get the maximum refund.

Conclusion

There are various ways to raise money through crowdfunding. Some people donate directly to the charity they’re supporting, while others may donate through a crowdfunding platform. Depending on the platform, the money can go directly to the charity or individual that the donor supports. Usually, crowdfunding platforms transfer the money to the organization or individual that receives the donations. However, some platforms won’t be able to transfer the money to the beneficiary.

Your crowdfunding campaign will be treated as a business and will qualify as an activity for tax purposes. Your crowdfunding campaign will be deemed an active business. Therefore, your tax obligations will be determined by the method of accounting that you choose. A cash accounting method will be more beneficial than an accrual approach. Additionally, your startup business may be eligible for other tax benefits. Among these are a research and development credit that can be applied to your payroll tax liability.

Whether you use the cash accounting method or the accrual accounting method, crowdfunding businesses are considered a business and must pay sales taxes. It is advisable to find out where your backers are from and issue the correct receipts.  For the crowdfunding creators, tax is an issue because they have to pay sales tax on pre-orders. The line between pre-orders and donations is often thin, but each state has a different sales tax on services and goods. The IRS also varies its rules for digital distribution, so the campaign must comply with the tax laws in each state.