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Must You Treat Crowdfunding Money as Taxable Income?

The Internet has allowed businesses to expand in ways that were not previously possible. In fact, the Internet has allowed businesses to form in ways that were not previously possible. In the past, if an individual or individuals wanted to start a business, startup money had to be found by individual means, by loan or by soliciting funds from investors, family members or other businesses through face-to-face interactions, letter campaigns or telephone calls. The Internet has seemingly changed forever the ways in which businesses can obtain startup and expansion money through its unique capacity for crowdfunding.

Your business may have been the beneficiary of a crowdfunding campaign over the past year. Perhaps you used crowdfunding money to start your business or to expand it. If so, you are likely grateful for this form of fundraising and are likely to utilize it in the future should you need to. However, it is important that you treat crowdfunding money with a certain respect. Failure to do so could lead to trouble in the event that your business becomes the subject of a tax audit.

It is important to consult an attorney experienced in tax law if you have received crowdfunding money on behalf of your business. The primary reason why it is so important to take this step is that it is currently unclear whether crowdfunding money must be treated as income or whether it may be treated as a nontaxable gift under certain circumstances.

The law on this subject is evolving rapidly. The same tax advice you received last year on the subject of crowdfunding may not be the same advice you receive this year. In addition, the law may change in relation to this issue next year and the year after as well. As long as this issue continues to evolve, it will remain important to consult an attorney if your business is the beneficiary of crowdfunding money.

Source: Findlaw Free Enterprise, “Is Kickstarter or Crowdfunding Money Taxable Income?” Brett Snider, July 22, 2014

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