Crowdfunding: A new source of business financing

October 21, 2013 Written by

If you are trying to finance a new business venture, you might want to check into an online option known as “crowdfunding.” In simplest terms, crowdfunding means many people give you money to fund your project in exchange for a reward such as a free copy of your product or a small stake in your new business.

As you explore the idea of crowdfunding, you may wonder about the tax treatment of the money you receive. Is it an investment in your business? A gift? Taxable income?

Here’s a broad overview.

* Investment. In general, under U.S. law, when you offer many “investors” stock or other equity in your business, you’re selling securities, and you have to comply with federal and state securities regulations. While the 2012 JOBS Act created a crowdfunding exemption to these regulations, the Securities and Exchange Commission has not yet finalized the rules. At present, calling the money you receive from crowdfunding an “investment” is not an option.

* Gift. Broadly defined, gifts are cash or other consideration you receive from someone who provides the gift freely, with no expectation of getting something from you in return. When you provide crowdfunders with a reward or other perk in exchange for financial support, the transaction typically will not meet the tax law definition of a gift.

* Income. Money you receive for your work – from whatever source – is income, and usually includable on your federal income tax return. Related expenses can be deductible.

Call us for more information on this or any business issues.



Written by: Doug Rodrigues