Income from fundraising is not considered a taxable source of income by the IRS. Tax fundraising laws define donations as gifts, which recipients do not have to report on their tax returns. Although the money you receive from fundraising is not taxable, you may still have to pay taxes, depending on how you hold the funds. People working on the fundraising campaign may also face tax consequences.
Income tax on donations received
The IRS does not tax beneficiaries on money received through fundraising. If you are fundraising for someone else, we recommend that you keep the money in a separate bank account to avoid discrepancies with the IRS. If you don't keep the funds separately, the IRS may ask you where the money in your account is coming from, especially if they are checking it. As a precaution, keep a record of all fundraising deposits to show the source of funds.
While there is no charge for donations received, there is a charge for the money you receive to collect them. For example, if an organization pays you $300 to host a fundraising booth at a local trade show, you must report it to the IRS as earned income. You can deduct all legitimate expenses associated with fundraising.
Taxation of interest-earning
If the money collected is held in an interest-bearing account, the account holder is liable for any taxable interest. For tax purposes, banks will grant interest to the person or entity whose Social Security number or Employer ID number is on the account. If you want to avoid interest taxes, ask your bank to set up an interest-free account. There will be no tax liability if there is a paid account dedicated exclusively to the fundraiser recipient.
Charitable deductions for donors
If you are fundraising for a 501(c)(3) recognized or nonprofit organization, donors are eligible for a tax deduction. However, donors cannot necessarily deduct the total amount donated. The price a donor pays for food, wrapping paper, magazines, or even a car wash is not fully deductible. Donors can only deduct the difference between the purchase price and the fair market value. For example, purchasing a $15 roll of gift wrapping paper that costs $7 at the store entitles the donor to an $8 deduction. Lottery tickets or tickets purchased as part of a fundraiser are never deductible.
A donor can only cancel the part of the donation he made without receiving anything in return. Additionally, donors can only deduct contributions to a qualified nonprofit organization. If you've donated money to help someone pay their medical bills, your contribution is kind but not tax-deductible.
When money is a gift
To better understand when group-funded donations are tax-exempt, it may be helpful to take an example.
Suppose John and Jane lost their home and belongings after a catastrophic flood. They have two young children and don't know where to go because insurance won't cover their losses or medical bills.
Jane's family steps in and creates a crowdfunding account to help the family. They end up raising $30,000 from 201 people. This exceeds the requirements of 1099-K, so the crowdfunding platform sends them a copy of the 1099-K that they sent to the IRS.
Assuming that John, Jane, and her family didn't give any of these 201 people anything in return for their money, the $30,000 can be considered a gift; they are not subject to taxes paid by the recipients of the gift.
WePay, a third-party company that distributes campaign income from crowdfunding sites, says the IRS has said it may not be necessary to send a Form 1099-K to the IRS if money given is considered a gift or donation.
Taxes Issues on GoFundMe
The development of sites such as GoFundMe and Causes has created an increase in crowdfunding. These sites allow users to create a fundraising campaign and easily share it through social media platforms. This increased the number of people raising money for charities and led more people to question the possible tax obligations involved.
Just like offline donations, online donations through crowdfunding platforms are still considered tax-free gifts. The recipient does not have to pay cash taxes, but the donor must report contributions over $15,000. The fees charged by the crowdfunding company are legitimate fundraising expenses that you can deduct if you have to pay taxes on the income you received as a fundraising payment.
Crowdfunding for your business
Starting or running a crowdfunding business is rarely a real treat. As such, it may be taxable income, but it depends on the details of the income.
Suppose your new business is struggling to get off the ground. Use crowdfunding to raise money and keep it until you start making a profit. You can give donors the device you invented in exchange for their money (rewards-based crowdfunding). If you do this, you will likely have to report the donation as business income, just like any other sale.
Or maybe you issue shares in your business, and they'll get a share of your business in exchange for their money. This second incentive is often called "capital crowdfunding." From a technical point of view, any profit from crowdsourcing donations is not "income" if it comes from crowdfunding. Technically, it's an investment - you've given the owner equity or a stake in your business in exchange for the money given, and it's not taxable profit for your business.
If you use donated funds to pay yourself, you will need to report them as income on your tax return.
Campaign organizers should consider their crowdfunding intent. Suppose the goal is to generate funds for a project that would be considered a transaction or activity outside of the crowdfunding context. In that case, it is likely to be considered taxable business income.
Bottom Line
Crowdfunding sites or third-party processors usually pay the person who created the account, not the ultimate beneficiary of the money. The crowdfunding organizer may receive a 1099-K form. It may be advisable to consult a tax professional if this happens to you. You can request an "agency" report to remove responsibility for any taxes that might be imposed.
Beneficiaries (non-organizers) should be prepared to show what has been offered and what has not been offered or redeemed for the resources received. This can usually be demonstrated with campaign records.
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