Did you know that supporting a crowdfunding campaign by generously donating money, could have an impact on your tax burden?
The IRS’s reporting requirements for crowdfunding donations cover everything from personal donations to creating campaigns on crowdfunding platforms such as GoFundMe. This means that you should understand the potential consequences of donating money to a good cause to avoid getting into trouble with the IRS.
Tax Consequences to the Donor
As a donor, you may be unable to claim a charitable deduction from the IRS if the recipient of your contribution does not fall under section 501(c)(3). In such a case, your charitable contribution would not lower your taxable income, which means it would not lower your taxable burden. The IRS does not treat donations from one individual to another as charitable donations. Instead, it treats them as nondeductible gifts to the recipient of the funds. This means that such donations may or may not attract a gift tax depending on the total amount. Specifically, if your donations exceed the annual exclusion amount, which is $14,000 in 2017, you would have to fulfill the necessary reporting requirements and pay the relevant gift tax. On the other hand, if they fall below this amount, they would have no tax consequences, so you would have no reporting requirement.
Tax Consequences to the Recipient
If you are the recipient of funds donated by donors out of their own generosity, there is no tax consequence to you. This means no exclusion amount, no tax on the receipt of such gifts and the IRS would not treat your gifts as taxable income. However, the IRS requires third-party payment settlement entity (PSE) entities to file Form 1099-K if a payee’s receipts exceed $20,000 or when the payee receives 200 donations or more. That means that if you use a crowdfunding platform, such as GoFundMe, to collect and distribute contributions to you and your account attains one of these thresholds, the organization will use Form 1099-K to report your recipients to the IRS.
Additionally, the organization will send you a copy of the form as well. While receiving Form 1099-K can be disconcerting, it does not necessary mean that your tax burden has increased. However, you may have to explain to the IRS the nature of your crowdfuning campaign. In essence, you would have no tax consequence if the gifts to you were out of generosity. At this point, it is important to note that, if you offer contributors a service or product in exchange for funds, then the IRS would treat the receipts as taxable income, meaning they would have a tax consequence. More specifically, you would have to pay income taxes.
Mistakes to Avoid
When creating a crowdfunding for someone else, either a friend or a loved one, you should avoid listing yourself as the payee. If you do so, it would report under your Social Security number and this could cause several problems for you. Firstly, while the receipts may not attract income tax, the IRS might receive the Form 1099-K with your name and details on it, leaving you some explaining to do. Secondly, you will have reporting requirements if the receipts exceed the excluded amount and you transfer the money to the intended recipient.
Some of the potential tax consequences of a crowdfunding campaign include gift taxes and income taxes. For this reason, you should consider consulting with a tax attorney in order to better understand these consequences before involving yourself in such a campaign.
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