If you’re trying to fund a project or business initiative through crowdfunding, then my husband may be your savior. He loves new technology and gadgets and loves spending money. Individuals like my husband who contribute money to projects on crowdfunding sites might be considered donors, customers or investors depending on the type of crowdfunding site.
For the uninitiated, crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, (friends, family, customers, and individual investors), typically via the Internet.
Crowdfunding sites like Indiegogo is a rewards-based system. Customers of the site can choose to contribute to a project and in return they receive a service, product or gift. These sites are unlike another type of crowdfunding platform which issues equity to the investor. Equity-based crowdfunding platforms have generated debate and legislation that ultimately resulted in regulation and reporting requirements deemed necessary to protect individual investors. Due to the additional complexity of equity platforms, let’s keep it “simple” and focus on the rewards-based platforms because even the rewards-based platforms create a lot of questions from an accounting and tax standpoint.
If a legal business entity creates a rewards-based crowdfunding platform through a site like Indiegogo, consider how that business should record the money it receives from its customers for accounting purposes. If the entity has an obligation to provide the customer with a service, product or gift in exchange for that customer’s contribution then the transaction certainly appears to be a sale from the business. The Statement of Financial Accounting Concepts (SFAC), a document issued by the Financial Accounting Standards Board, states that revenues should be recorded when the following conditions are met:
- Amounts are realized or realizable, i.e., converted or convertible into cash or claims to cash
- Amounts are earned, i.e., activities that are prerequisite to obtaining benefits have been completed
Therefore, any money received from a rewards-based system should likely be treated as revenue or deferred revenue (a liability account on the balance sheet) if there is a delay in shipping the product or gift to the customer.
For tax purposes, business owners should consider the tax effect of recording these revenues. If it truly is a sales transaction, the business may be subject to sales tax, income tax and Commercial Activity Tax (for entities located in Ohio). So far the IRS has not offered any guidance on the transactions related to crowdfunding sites; therefore, it is up to the business owners and their financial advisors to best determine how the transactions fit in to the current accounting and tax regulations.
If you’re interested in discussing your specific transactions involving a crowdfunding site please feel free to reach out to me to start a conversation. Click here to email me or call me at 440-449-6800.