July 25, 2014

Crowdfunding is helping thousands of businesses acquire much-needed capital and build a core fan base. Businesses of all kinds and for many funding purposes are using crowdfunding platforms, from yoga studios looking to grow into larger spaces to tech innovators wanting to bring new gadgets to market.

If you’re considering a campaign to launch your business, expand a product line, or fund a special project, scheduling a few minutes with Talley and Company’s advisory team can ensure your campaign is set up properly from the start to avoid obstacles from a tax and legal perspective. (There’s nothing worse than obtaining hard-earned funding only to discover that federal and state tax obligations may keep you from fulfilling your vision.)

For businesses, there are two main avenues for crowdfunding, and depending on which you choose, the tax and legal implications will differ greatly. In the rewards-based approach, supporters are typically offered a chance to earn tiered rewards for different contribution levels. These can be anything from a branded T-shirt to pre-ordering a product still in development. Kickstarter and Indiegogo are two popular platforms.

With this option, the income you derive from your campaign will most likely fall under one or more of four categories: revenue, sales, investment or gift. In most cases, the money you earn from a campaign will have to be included as gross income for your business. If you’re offering a product or service in exchange for donations, you may also need to pay sales tax from customers in the state that you’re registered. The expenses you incur for fulfillment of rewards, products or services may be deductible against the income you earn. In some cases, funders will request nothing in return other than the joy of knowing they helped bring an ingenious idea to life. With meticulous records, these may be claimed as gifts. Just keep in mind that the IRS has stricter definitions for what falls under this category than you or I might.

In the equity-based approach, investors get a financial return or an ownership stake in the company for their support. Crowdfunder is one of the platforms in this newly developing category. If you’re using this option, the tax and legal obligations are a different animal entirely, since now we’re talking about investment money and not revenue. In fact, the laws in this area are still undergoing changes, so keeping in close contact with your legal team right from the beginning is essential.

No matter which option you choose, a successful campaign involves a lot of forethought, time and planning to reach funding goals and generate priceless media attention for your big idea. If you’d like to see the creative strategies and executions used by the most highly funded companies, check out the Top 100 Crowdfunded Companies.