Crowdfunding and taxes

In Information Letter 2016-0036 (6/24/16), the IRS explains general rules that might apply to someone’s receipts of funds via a crowdfunding platform. It doesn’t mention any websites, but examples of such web platforms include Kickstarter and GoFundMe. The IRS notes the broad rule of Section 61 that receipt of funds is likely to be taxable gross income. Three examples of non-taxable receipts offered by the IRS are:

a.       Loans (must be paid back)

b.      Capital contributions (equity)

c.       Gifts “made out of detached generosity and without any ‘quid pro quo.’”

Without details, the IRS also states: “However, a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.”

Reg. §1.451-2 on constructive receipt is also mentioned. Per the IRS: “income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. The regulation further provides that income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. However, a self-imposed restriction on the availability of income does not legally defer recognition of that income.”

The IRS also states that the particular facts and circumstances of the funding must be examined to determine the tax consequences.

The IRS also notes that a taxpayer may request a private letter ruling (PLR) on how the law applies to their particular situation.

Observations: It would be helpful if the IRS would issue a publication with an explanation of the general rules as many people generating funds from crowdfunding do not know about the tax consequences. They are likely to get a 1099-K from the crowdfunding website. The IRS should explain what the recipient should do with a 1099 that doesn’t represent taxable income. The publication should also cover the rules for the contributor of the funds. It is not unlikely that someone contributing funds for a stranger’s medical bills thinks it is a charitable contribution (even though it is likely that there was no Section 501(c)(3) entity).

The IRS should issue binding guidance on when a “gift” crowdfunding site might be taxable to the recipient even though there is no “quid pro quo.”

One example that comes to mind for me is where there is some type of relationship (other than family) between the giver and the givee.  For example, let's say a college student sets up a fund to get money to help pay tuition. Her employer contributes funds. That is not really a gift because the employer expects something from the employee/student - continued work or perhaps it is for past work.  It would be nice to see a revenue ruling from the IRS with various fact patterns and the tax treatment for both parties.  A lot of this is not new law, just new fact patterns.  

The law also needs to be changed to require the crowdfunding site to issue a 1099 regardless of the dollars involved.  Again, IRS guidance would help on what to do with the 1099, particularly if the amount received either is not income (for example, it is loan proceeds) or it is an excludable gift.

States also need to issue guidance on the state income and sales tax consequences of crowdfunding.

Also see my post of 2/14/11.

What do you think?

Tax Issues for High Tech - a video!

Tax issues for high tech - no doubt this will continue to be a hot area for many years to come. Changes in how we live and do business challenge existing tax rules. This a key focus for this blog and my research.

I recently delivered a one hour webinar for Accounting Fly for college accounting majors and recent alums on this topic.  They have it posted to You Tube, so if interested, I share it with you - HERE.  It is not intended to be a deep dive into complex issues, but an awareness of "high tech," some of the key rules and issues that exist, and why.  It includes a bit about the "new economy."

What do you think?

Helping new economy clients - June 22 event can help

A theme that came through at Part 1  and  Part 2 of House Small Business Committee hearings in late May on The Sharing Economy: A Taxing Experience for New Entrepreneurs, was that these freelancers need help with their tax planning and compliance. For example, someone who signs up to drive for Uber or Lyft likely doesn't realize that they just became a self-employed entrepreneur with tax obligations that include:

• Keeping records of mileage for driving and other costs involved in being a driver (or freelancer for some other network platform operation).
• Quarterly estimated tax payments for federal and state income tax as well as federal self-employment taxes.
• Reconciling any 1099-MISC or 1099-K received against their records.  And if they don't receive such a form, such as because the payment processor is only required to issue 1099-K and the freelancer did not have more than 200 transactions and over $20,000 of payments, sufficient records to report the income earned.
• Registration at the local level if required, such as for a business license tax. [See for example, San Francisco + 4/15/16 SFGate article.]
• Possibilities of favorable retirement plan options.
• Whether they want to operate as a sole proprietor or perhaps another form, such as a Subchapter S corporation.

And, even before jumping to the conclusion that one is a self-employed entrepreneur filing Schedule C, a determination is needed to be sure they are engaged in the activity for profit (it might instead be a hobby).  Some drivers are just doing it for fun or to derive a little cash flow.  [For more on this issue, see the nine factors of Reg. 1.183-2 and info below.]

Other new economy activities include renting our all or part of your home or other property, such as via Airbnb. That also raises some complex federal, state and local tax considerations.  I also list marijuana operations in the realm of new economy activities and that raises various tax issues as well as ethical ones for the tax adviser.

The 4th Annual IRS-SJSU Small Business Tax Institute on June 22 in Santa Clara aims to help practitioners serving small business clients. We'll have practitioners and IRS folks explaining the rules, offering words of caution and we'll also address some of the ethical issues for practitioners [agenda].

I hope you'll check out the agenda and register - http://www.tax-institute.com.

Digital Economy, Tax Issues and Due Diligence

We've been in the "digital economy" for some time, yet it continues to evolve with new business activities and ways of living. And, we see "old economy" businesses, like Ford Motor, move more into the new economy.

I define the digital economy fom the perspective of how people and businesses engage in it:

• Transacting business with virtual currencies, such as Bitcoin;
• Providing digital goods and services; and
• Transacting business enhanced by the Internet, such as finding customers, including working in the “sharing economy.”

There are numerous federal, state and local tax issues with these transactions usually due to the fact that existing tax rules were not written with these new ways of doing business in mind. 

I've got an article in CCH's Journal of Tax Practice and Procedure (May-June 2015) on "Taxation and Today's Digital Economy," with more details as to the issues.  It also includes a due diligence worksheet that hopefully tax practitioners will find useful.

What do you think? Any additional issues or due diligence tips?