Crowdfunding for social causes is quickly gaining in popularity. A number of sites, such as Kickstarter, Fundraise.com, CauseVox, Fundly, Razoo, Indiegogo, and Community Funded are redefining how non-profits and student organizations raise money for events and charitable causes.
Starting a nonprofit crowdfunding campaign is neither easy nor simple despite the positive social motivation of the typical campaigner, notes William Michael Cunningham, an investment advisor, researcher, social investing policy analyst and the author of The JOBS Act: Crowdfunding for Small Businesses and Startups. “The reason for this is that the process of creating a nonprofit is complicated, due to the benefits they receive from the government. One of the most useful assistance the U.S. government provides is support to social benefit organizations via an exemption or tax deduction for contributions.”
Crowdunding is a new method of raising money and IRS has not yet announced guidelines regarding tax procedures for campaigns, explains Cunningham in his blog. Campaigns created through crowdfunding platforms are usually subject to taxes, except for those organizations who have tax exempt status. Legal charitable organizations that meet requirements of Internal Revenue Code section 501(c)(3) are exempt from federal income tax as charitable organizations.
Cunningham adds that other organizations or individuals who do not fall in to this category can be considered tax-exempt as a social welfare organization, as described in Internal Revenue Code (IRC) section 501(c)(4). To be eligible, an organization must prove that it was not organized for profit and must be operated exclusively to promote social welfare. The earnings of a section 501(c)(4) organization must not benefit any private shareholder or individual.
Therefore, many projects raising money online need to claim their pledges as business income, regardless of the total funding amount. Some individuals and emerging arts organizations use a fiscal sponsor such as Fractured Atlas. Fiscal sponsorship allows campaigners to raise funds using the sponsoring organization’s tax-exempt status as a 501(c) 3-classified organization. This means donations made to fiscally sponsored campaigns are tax deductible for the donor.
Campaigners may have room to deduct expenses like incentives and marketing on their tax returns. While some projects will be exempt—nonprofits and select creative projects —it is important for campaigners to anticipate crowdfunding tax.
As many industry experts point out, businesses “pre-selling” products via rewards-based crowdfunding need to recognize the fact that they may incur sales tax at the end of the campaign. To avoid any big surprises, calculate taxes upfront and incorporate them into a campaign’s budget. Sites like Kickstarter and Indiegogo offer tax guides.
“If you are planning to start a nonprofit project, be sure to let the government know that you are working on a ‘good thing.’ Without your official recognition, you will be subject to taxation,” notes Cunningham. “One more important fact is that some crowdfunding platforms do not allow nonprofit projects. Some that do allow nonprofit projects may take charge as much as 7%. Thus, researching crowdfunding platforms should be one of your first steps when planning a crowdfunding project.”