21 ms·

Crowdfunded businesses may owe taxes, too

23 points by eplanit 14y ago

jlarocco 14y ago
This seems pretty obvious. If you're raising money and you're not a non-profit, then you're going to owe taxes.
- jcoder 14y ago
  As I read the article, it's not about raising money---it's about the exchange/the transaction. By offering "rewards" on KS, you're making a sale.
  - einhverfr 14y ago
    The point has to do with what you are exchanging. In general you are going to only gain money in these cases in one of three ways: 1) Sale of a good or service (direct or indirect). This is income and if income exceeds expense, will increase taxable income. If income does not exceed expense then as a fundraising effort it is a failure. 2) Sale of equity. This is not income. It's a straight asset/equity swap. This can be done crowdsourcing too due to recent regulatory changes. 3) Sale of promissory notes. This is not income. It's a straight asset/liability swap. I would be surprised if you could go out and sell bonds on street corners but if you could it too would not be income unless you were paying back less than what you sold it as which isn't usually the way these things world.
    - rprasad 14y ago
      Actually, you just provided 3 taxable transactions. The sale of equity is taxable as income to the seller. I believe you actually mean the issuance of stock by the corporation in exchange for contributions of cash or other property to the corporation. This is not a sale, nor is it taxable. See Sec. 351. The sale of debt is income to the seller. I believe you mean the issuance of debt by the corporation in exchange for a loan of cash or liquidable assets. This is not a sale. Note that income is not a matter of gain or loss. You can sell something for a loss and still have income. However, gain or loss is relevant to the determination of how much in taxes you pay for the year. That discussion could fill entire hard drives.
- einhverfr 14y ago
  Not necessarily. It really depends on specifics. Are you selling goods as in via kickstarter? I suppose there may be cases where someone abuses the service in ways that don't increase tax liability. Are you crowdfunding by selling equity in your business (as allowed by the JOBS act)? That's not taxable income any more than it is income when you capitalize your own business. No income is accrued. Really, every startup founder should be familiar with the basics of double entry accounting. Then it is easy to figure out questions like this.
greenback 14y ago
"It it's a sale, it's taxable". Where does the money go? Wait... I already pay 1000 different taxes every day. We should just blindly accept whatever politicians tell us to do.
- rosser 14y ago
  In what world is selling something not going to incur a tax liability?
  - deleted 14y ago
    [deleted]
  - deleted 14y ago
    [deleted]
  - eli 14y ago
    Well, to be fair, that's typically how the online world works in practice in America.
    - einhverfr 14y ago
      Really? They don't pay income tax?
      - mcherm 14y ago
        Sales tax may not apply to online sales in the US (that is changing, and depends on the state involved and whether the company has any presence in the state). Income taxes are never incurred because of sales, only because of income. To oversimplify: no net income -- no income tax.
        eli 14y ago
        That's not quite true. I believe in every state you are supposed to declare goods you buy online and didn't pay sales tax for in your end of year taxes. I don't think anyone really does this and it hasn't been enforced. The current fight isn't over whether online sales should pay sales tax, but over who should be in charge of collecting that tax: the seller or the buyer.
daemon13 14y ago
This whole article reads kind of bullshit from US GAAP perspective. In case people who pledge will receive tangible goods in exchange, of course it is a sale. But these pledges will be accounted for as as prepayments in the start-up's books. The sale most probably will be recognized when the goods will be shipped|delivered and will be offset with cost of goods sold. R&D expenses are completely different matter, and will be expenses or expensed/capitalized based on applicable accounting/tax policies.
- einhverfr 14y ago
  Yeah. Additionally any article you'd get there will oversimplify to the point of mostly offering an admonishment to check with an accountant. As a business typically you are going to pay for net income. Calculating net income is going to be difficult in this case because it depends on what you are raising money to do. Raising $500k to pay some experts to go develop the world's best pizza recipe in a year? Do this the same year as the fundraising? If you can spend all of the money you raise on bona fide business expenses (but see amortization below!) then it isn't going to raise your tax liability at all. Similarly suppose it is for a pizza oven. Now we get into the complications. Do the tax laws (we are talking tax accounting not GAAP or financial accounting here) allow you to take the whole thing off the first year? or are you required to amortize the cost at a specific schedule? Irrespective of the ability to do so, would you prefer to amortize over a specific schedule with the idea that you save up for a replacement? Now you get all the questions that matter and the answer as to whether it raises your taxes or not are not at all straightforward. The real lesson should be "talk with your accountant but also learn the basics yourself."
  - daemon13 14y ago
    Well, as with technical/coding matters, there are 3 tactics to reduce probability of getting into trouble: 1. Learn basics of accounting (or coding for that matter), it is not that difficult. 2. Have a good expert in your team and rely on his/her judgement. 3. Listen to 3 experts talk and form your own opinion. Going back to the crowdfunding example, the actual decisions and actions will depend on the start-up's specific situation. When we speak about R&D, for example development of new software or hardware, in most of the cases it is possible to capitalize R&D expenses and defer those expenses hitting P&L. BUT this will actually increase corporate profit tax in the current and following 1-2 years. And this will increase cash outlay now because due taxes are indeed need to be paid. On the other hand if the start-up [meaning legal entity] is not profitable, it is possible to defer profit tax using carry forward provisions [which have specific limitations re amounts/timeframe/eligibility]. So, yes, learn basics, but speak with expert... :-)
deleted 14y ago
[deleted]
rprasad 14y ago
It depends. This is how the US federal income tax code would probably treat the issue: - If the business is an S-Corp or a Pass-through (i.e., LLC or partnership), then it reports income when funds are received. Individuals and pass-through entities are cash method taxpayers, so they report income when received, not when earned. - However, if the business is a C-Corporation, they report income when the transaction is completed. C-corps are "accrual" method taxpayers, so they report income when actually earned regardless of when actually received. This does not mean the business actually owes taxes on the income, since businesses are taxed on net income, i.e., profits remaining after expenses, credits, and various deductions are deducted from revenues.

23 points by eplanit 14y ago

jlarocco 14y ago

This seems pretty obvious. If you're raising money and you're not a non-profit, then you're going to owe taxes.

jcoder 14y ago
As I read the article, it's not about raising money---it's about the exchange/the transaction. By offering "rewards" on KS, you're making a sale.
- einhverfr 14y ago
  The point has to do with what you are exchanging. In general you are going to only gain money in these cases in one of three ways: 1) Sale of a good or service (direct or indirect). This is income and if income exceeds expense, will increase taxable income. If income does not exceed expense then as a fundraising effort it is a failure. 2) Sale of equity. This is not income. It's a straight asset/equity swap. This can be done crowdsourcing too due to recent regulatory changes. 3) Sale of promissory notes. This is not income. It's a straight asset/liability swap. I would be surprised if you could go out and sell bonds on street corners but if you could it too would not be income unless you were paying back less than what you sold it as which isn't usually the way these things world.
  - rprasad 14y ago
    Actually, you just provided 3 taxable transactions. The sale of equity is taxable as income to the seller. I believe you actually mean the issuance of stock by the corporation in exchange for contributions of cash or other property to the corporation. This is not a sale, nor is it taxable. See Sec. 351. The sale of debt is income to the seller. I believe you mean the issuance of debt by the corporation in exchange for a loan of cash or liquidable assets. This is not a sale. Note that income is not a matter of gain or loss. You can sell something for a loss and still have income. However, gain or loss is relevant to the determination of how much in taxes you pay for the year. That discussion could fill entire hard drives.
einhverfr 14y ago
Not necessarily. It really depends on specifics. Are you selling goods as in via kickstarter? I suppose there may be cases where someone abuses the service in ways that don't increase tax liability. Are you crowdfunding by selling equity in your business (as allowed by the JOBS act)? That's not taxable income any more than it is income when you capitalize your own business. No income is accrued. Really, every startup founder should be familiar with the basics of double entry accounting. Then it is easy to figure out questions like this.

greenback 14y ago

"It it's a sale, it's taxable". Where does the money go? Wait... I already pay 1000 different taxes every day. We should just blindly accept whatever politicians tell us to do.

rosser 14y ago
In what world is selling something not going to incur a tax liability?
- deleted 14y ago
  [deleted]
- deleted 14y ago
  [deleted]
- eli 14y ago
  Well, to be fair, that's typically how the online world works in practice in America.
  - einhverfr 14y ago
    Really? They don't pay income tax?
    - mcherm 14y ago
      Sales tax may not apply to online sales in the US (that is changing, and depends on the state involved and whether the company has any presence in the state). Income taxes are never incurred because of sales, only because of income. To oversimplify: no net income -- no income tax.
      - eli 14y ago
        That's not quite true. I believe in every state you are supposed to declare goods you buy online and didn't pay sales tax for in your end of year taxes. I don't think anyone really does this and it hasn't been enforced. The current fight isn't over whether online sales should pay sales tax, but over who should be in charge of collecting that tax: the seller or the buyer.

daemon13 14y ago

This whole article reads kind of bullshit from US GAAP perspective. In case people who pledge will receive tangible goods in exchange, of course it is a sale. But these pledges will be accounted for as as prepayments in the start-up's books. The sale most probably will be recognized when the goods will be shipped|delivered and will be offset with cost of goods sold. R&D expenses are completely different matter, and will be expenses or expensed/capitalized based on applicable accounting/tax policies.

einhverfr 14y ago
Yeah. Additionally any article you'd get there will oversimplify to the point of mostly offering an admonishment to check with an accountant. As a business typically you are going to pay for net income. Calculating net income is going to be difficult in this case because it depends on what you are raising money to do. Raising $500k to pay some experts to go develop the world's best pizza recipe in a year? Do this the same year as the fundraising? If you can spend all of the money you raise on bona fide business expenses (but see amortization below!) then it isn't going to raise your tax liability at all. Similarly suppose it is for a pizza oven. Now we get into the complications. Do the tax laws (we are talking tax accounting not GAAP or financial accounting here) allow you to take the whole thing off the first year? or are you required to amortize the cost at a specific schedule? Irrespective of the ability to do so, would you prefer to amortize over a specific schedule with the idea that you save up for a replacement? Now you get all the questions that matter and the answer as to whether it raises your taxes or not are not at all straightforward. The real lesson should be "talk with your accountant but also learn the basics yourself."
- daemon13 14y ago
  Well, as with technical/coding matters, there are 3 tactics to reduce probability of getting into trouble: 1. Learn basics of accounting (or coding for that matter), it is not that difficult. 2. Have a good expert in your team and rely on his/her judgement. 3. Listen to 3 experts talk and form your own opinion. Going back to the crowdfunding example, the actual decisions and actions will depend on the start-up's specific situation. When we speak about R&D, for example development of new software or hardware, in most of the cases it is possible to capitalize R&D expenses and defer those expenses hitting P&L. BUT this will actually increase corporate profit tax in the current and following 1-2 years. And this will increase cash outlay now because due taxes are indeed need to be paid. On the other hand if the start-up [meaning legal entity] is not profitable, it is possible to defer profit tax using carry forward provisions [which have specific limitations re amounts/timeframe/eligibility]. So, yes, learn basics, but speak with expert... :-)

deleted 14y ago

[deleted]

rprasad 14y ago

It depends. This is how the US federal income tax code would probably treat the issue: - If the business is an S-Corp or a Pass-through (i.e., LLC or partnership), then it reports income when funds are received. Individuals and pass-through entities are cash method taxpayers, so they report income when received, not when earned. - However, if the business is a C-Corporation, they report income when the transaction is completed. C-corps are "accrual" method taxpayers, so they report income when actually earned regardless of when actually received. This does not mean the business actually owes taxes on the income, since businesses are taxed on net income, i.e., profits remaining after expenses, credits, and various deductions are deducted from revenues.