- Everything Tax Professionals Need to Know about Crowdfunding
Everything Tax Professionals Need to Know about Crowdfunding
While it is important to have the best professional tax preparation software available, it’s also important to be prepared for whatever type of client will come your way. Indeed, tax professionals need to be knowledgeable enough to navigate the different industries. Now, when it comes to one of the trickier industries to understand, crowdfunding has always been near the top of the list of most difficult clients to handle. However, this shouldn’t discourage you. A huge part of the difficulties that come with handling crowdfunding stems from the lack of knowledge on the processes and policies involved. In this article, we’ve prepared a brief guide on everything that tax professionals need to know about crowdfunding. We hope this guide proves to be useful when it comes to helping you navigate the industry more effectively:
One of the first things you have to learn is the important terms associated with crowdfunding. To help you out, we’ve put together a list of essential terms and what they mean so that you’ll have an easier time handling crowdfunding clients:
- Crowdfunding: Crowdfunding is the practice of soliciting contributions from a large number of people to provide funding for a project.
- Backer: Backers are individuals who contribute to crowdfunding campaigns.
- Deductible Charitable Contribution: Deductible charitable contributions are donations made towards an organization that is recognized by the Internal Revenue Service (IRS).
- Donation Model: The donation model is the method of funding for a crowdfunding campaign, where the backers receive a reward for their contribution.
- Equity model: The equity model is the method of funding for a crowdfunding campaign, wherein the backers receive an ownership stake in the project in exchange for their contribution.
- Platform: The platform is the middle person that connects the backers with the individuals or organizations behind the crowdfunded project.
While it’s important to understand the terms, in theory, you also must have a good grasp of how they function in practice. Essentially, a crowdfunding campaign is used to raise funds by utilizing the huge reach of the Internet. It is usually used to gather financial contributions for business ventures, social causes, and sometimes even support for individuals who are in a time of need. Crowdfunding campaigns are only possible through the use of crowdfunding platforms. These platforms ensure that the contributions that backers put into a certain project are used for their intended purpose, making it safe for backers when it comes to avoiding scams. Now, these platforms don’t offer their services for free. In general, they take around 3 to 5% of the funds as a fee for their services.
We also need to talk about tax issues that you may have to handle when it comes to crowdfunding. Suppose you’re handling the taxes for the people behind the crowdfunding campaign. In that case, you’ll want to be prepared to handle issues regarding the determination of taxable income, self-employment tax, state and local income taxes, and excise taxes. On the other hand, if you’re employed by the backers, you’ll want to look into the deductibility of their contributions, gift tax returns, capital gains, and use tax.
While it may be difficult to handle crowdfunding at first, it’s not something that you won’t be able to overcome with the right amount of preparation. If you ever feel lost at any point, feel free to look back at this article so that you can clear up any issues that you may have regarding this topic. If you’re looking for professional tax preparation software
to streamline and optimize your processes, our products at Keystone Tax Solutions are just what you need. Get in touch with us to begin your free demo today!