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Crowdfunding and Taxes: What Maryland Residents and Business Owners Need to Know in 2022

News, Offshore Account Update

Posted in on August 12, 2022

Whether you use crowdfunding to kickstart your business, you receive support through crowdfunding after a life-altering event, or you contribute to a crowdfunding campaign, it is important to understand what this means (and doesn’t mean) for your federal income taxes. Crowdfunding has different tax implications under different circumstances, and knowing how the Internal Revenue Code applies to your circumstances is critical for avoiding unwanted scrutiny from the Internal Revenue Service (IRS).

5 Important Facts about the Tax Implications of Crowdfunding

So, what do you need to know about the tax implications of crowdfunding? Here are five important facts for recipients and contributors in Maryland:

1. Campaigns Conducted for Business Purposes Trigger Income Tax Liability

Generally, crowdfunding campaigns conducted for business purposes trigger income tax liability. If a business receives contributions in exchange for goods or services to be provided (even if these are styled as “free” rewards for contributing), the contributions will generally be considered ordinary business income.

2. Campaigns Conducted for Charitable Purposes Don’t Trigger Income Tax Liability (In Most Cases)

As the IRS recently explained, “If crowdfunding contributions are made as a result of the contributors' detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized.” In other words, crowdfunding campaigns conducted for charitable purposes don’t trigger income tax liability in most cases.

3. Charitable Crowdfunding Campaigns Aren’t Actually Charities

But, even when a crowdfunding campaign is charitable in nature, the campaign isn’t actually a “charity” for federal tax purposes. To qualify as a charity, an organization must secure tax-exempt status from the IRS, and it must accept donations for the purpose of furthering its mission in support of the greater good. So, by definition, crowdfunding campaigns conducted for the benefit of an individual, family or non-exempt business are not “charities”—even though they are charitable in nature.

4. Crowdfunding Contributions Are Not Tax Deductible

Since crowdfunding campaigns aren’t true charities, contributions are not tax deductible. The IRS categorizes contributions as gifts rather than charitable donations. So, while charitable contributions do not trigger tax liability for the recipient, they also do not offer tax benefits for the contributor.

5. Improperly Reporting Crowdfunding Receipts or Contributions Can Lead to IRS Penalties

The IRS is starting to pay more attention to crowdfunding, and this means that recipients and contributors can expect to face scrutiny. If an IRS audit uncovers a business’s failure to report crowdfunding revenue or a contributor’s improper deduction, this can lead to back taxes, interest and penalties. As a result, recipients and contributors alike need to be careful, and they should seek counsel if they have questions or concerns about their tax obligations.

Need Tax Help in Maryland? Contact Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, brings more than 20 years’ experience to helping individuals and businesses resolve issues with the IRS. If you have tax questions related to crowdfunding in Maryland, you can call 240-235-5096, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.

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