Crowdfunding & Taxes: Kickstarter’s Hidden Bite (& How to Stop the Bleeding)
After months of busting your hump making pitch videos, coming up with rewards, and tweeting like there was no tomorrow, (hopefully) you've found yourself celebrating a fully funded crowdfunding campaign. However, before you start reveling in your success, you might want to figure out just how much of those funds will make it into your production's budget not only after you pay your platform's fees, but after you pay the taxman as well. Yes, taxes can take a pretty substantial bite out of your funds, but here are a few ideas on how to run your Kickstarter campaign to make the bite less severe come Tax Day next year.
This is a guest post by Ben Henretig.
Kickstarter has emerged as an incredibly powerful platform for creatives to crowd-fund their creative work. In October of 2012, I ran a Kickstarter campaign to fund my feature documentary The Happiest Place, which explores what we in the West might be able to learn about living happier, more meaningful lives from the small Himalayan Kingdom of Bhutan -- the only country in the world to use Gross National Happiness as the yardstick for progress. The campaign exceeded our wildest expectations -- in two days we met our goal of $45,000 and finished the campaign at nearly 250% our goal -- $112,000.
We were ecstatic. After months of hustle and personal investment, I finally had the money to bring this film to life. Yet, in the months since closing the campaign, I've come face-to-face with the hidden costs of running a Kicktarter campaign. After Kickstarter and Amazon take their share (collectively about 8%), you pay for fulfillment of the prizes you've offered (say, 10% to 15%) and income tax on the total (up to 44% depending on the total funds raised and your tax bracket!) you as a creator retain more like 38% - 82% of the total you've raised. Not exactly free money.
The single most impactful factor for determining how much of your hard-earned Kickstarter money ends up in your pocket is the degree to which you are able to reduce your tax exposure.
I am by no means an accountant and am not qualified to give proper tax advice, but my hope is that by outlining a few (avoidable) mistakes, I can help save you some money and heartache.
Include the cost of taxes and reward fulfillment when preparing your budget.
The painful reality is that the entire total you raise through Kickstarter is the total that's reflected on the form 1099-K you receive from Amazon Payments and that you pay tax on, NOT the total that you are paid after Amazon and Kickstarter take their share. Crazy, right? So, the taxable total reflected on my form 1099-K was $111,937.01, which reflected the total funds raised ($112,110) minus any payments that were pledged but didn't go through. If you aren’t able to spend 100% of your Kickstarter funds on deductible expenses in the tax year you receive your funding, make sure to budget for the tax burden.
Run your campaign in the beginning of the tax year
Like most Kickstarter campaigners, I intend to spend every penny of our funds on the film, which should mean that we should have significant tax deductions and reduce our tax liability to almost zero.
Unfortunately, I ran my campaign near the END of the tax year (October/ November), which meant that after the money hit our account we only had a window of 2 months to rack up deductible expenses and reduce our tax exposure. By running your campaign early in the tax year, in which you plan to spend the majority of your Kickstarter funds, you can afford yourself a much larger window and deduct a significant portion (if not all) of the Kickstarter funds and reduce your tax liability.
I've got the money in -- now how can I reduce my tax liability?
Assuming you aren't able to spend all of your Kickstarter funds received in a given tax year, there are a few ways to explore reducing your tax liability. Some are common practice, and others are still rather unproven.
Given that Kickstarter and crowdfunding as a whole are relatively new phenomenon, it's still a bit unclear exactly how the Kickstarter funds are treated with respect to tax law, so take this advice with a grain of salt.
Here’s what Kickstarter has to say on the matter.
The case can be made that a portion of the Kickstarter funds qualify as a "gift" rather than income, given that for each prize that is selected a small portion pertains to the actual value of the reward -- the rest is essentially a "gift." Supporters of your campaign don’t think the amount they are paying is just for the reward; it’s assumed that most of the donation is a "gift" for which your receive a modest reward. So, for example, in the case of a $45 pledge for a DVD, $15 may correspond to actual cost of the DVD and the rest would be considered a gift.
Subsequently, the approach one accountant I've spoken with has taken is to include an excel schedule with your return detailing every transaction/gift made -- then the portion of each gift that would qualify as "taxable income" (which basically corresponds to the cost of the actual goods/services the person would be receiving at a given prize level) as well as the "gift amount" which corresponds to the amount above the cost for a prize level. In my example above, the gift amount would be $30 per $45 gift. Using this approach could reduce your exposure significantly, although it should be noted that, while defensible, the jury is still out as to whether the IRS considers it valid.
Another approach, detailed by Michael Guenther, is to use the accrual method of accounting which would allow you to pay taxes on the funds received when the balance is earned (i.e., your product/game/film is made) rather than when you receive payment. This would give you much more time to spend your Kickstarter funds on your project and deduct the expenses.
Consider creating an entity / LLC (if you haven't already) for receipt of funds rather than using your personal information.
When I ran my campaign I had yet to form an LLC for the film, so I used my personal social security number/tax ID to create my Amazon Payments account (If you didn't know, Amazon Payments processes payments for Kickstarter). Later, in my mad scramble to find a way out of paying taxes on the entire balance of $112k in my personal income taxes, I found out that as an LLC if you file as a C-Corp have the opportunity to elect the timing of your financial year-end, which means that if I was able to have the K-1 from Amazon Payments sent to the C-Corp rather than to me personally as an individual, I would have been able to extend the financial year for my film many more months and have more time to spend down the $112k and reduce my tax exposure.
Yet, after many, many calls to Amazon to try and update my account information on file to change it to the LLC, I found out that Amazon refuses to change your payment information on file after any money has hit the account. Takeaway -- be certain that your Amazon Payments account profile reflects the vehicle you want to have incur the tax burden for the funds, and be clear on the costs and benefits of using your personal SSN or that of your LLC.
If you only take one thing from this post, it would be to meet with a credible accountant BEFORE running your campaign. (In addition to Michael Guenther, I would recommend Fred Siegel -- feel free to follow @happiestfilm on Twitter/DM me and I’ll send you details).
Do you have any ideas as to how to reduce the tax burden for Kickstarter campaigners? Let us know in the comments below!
Ben Henretig founded Micro-Documentaries, because he believes in the power of documentary film to bring about social change and inspire action. A graduate of Stanford University Film and Media Studies, he uses his background in art, music, communications and filmmaking to produce beautiful, powerful short-format documentaries for nonprofits and purposeful businesses making positive change in the world. Currently, Ben is working on two feature-length documentary films: A Las Calles, that follows the lives of working/street children in Quito, Ecuador, and The Happiest Place, a feature-length documentary telling the story of the first human-powered, border-to-border journey across Bhutan.