Crowdfunded businesses may owe taxes, too(reuters.com)
reuters.com
Crowdfunded businesses may owe taxes, too
http://www.reuters.com/article/2012/08/13/us-column-feldman-crowdfunding-taxes-idUSBRE87C0F120120813
5 comments
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."
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."
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... :-)
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... :-)
You're confusing the issue.
Capital is never taxed as income under the U.S. income tax code. Ergo, the money raised in your example would never subject the business to income taxes.
Prepayments of revenue, i.e., for goods or services that will be provided in the future, are income and are taxed as income. Ergo, if you collect prepayments of $500,000 from pizza-lovers to sell them the pizza that you will develop using their money, the net would be taxed.
Capital is never taxed as income under the U.S. income tax code. Ergo, the money raised in your example would never subject the business to income taxes.
Prepayments of revenue, i.e., for goods or services that will be provided in the future, are income and are taxed as income. Ergo, if you collect prepayments of $500,000 from pizza-lovers to sell them the pizza that you will develop using their money, the net would be taxed.
Capital (equity) and net income (income - expense) are separate. It is possible, as you point out, for for taxes to be affected and this is what I am getting at. Something can affect equity and assets without affecting net income but net income always affects equity and assets.
As for prepayments, assuming you aren't one of the rare cash-basis filers, it will be deemed income at the time goods are delivered (and is technically a loan before that point since you have a debt (the goods to deliver) to the customer and if you have to refund the money you may yet have to do so.
As for prepayments, assuming you aren't one of the rare cash-basis filers, it will be deemed income at the time goods are delivered (and is technically a loan before that point since you have a debt (the goods to deliver) to the customer and if you have to refund the money you may yet have to do so.
This seems pretty obvious. If you're raising money and you're not a non-profit, then you're going to owe taxes.
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.
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.
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.
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.
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.
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.
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.
"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.
We should just blindly accept whatever politicians tell us to do.
In what world is selling something not going to incur a tax liability?
In the world before 1913 when the unconstitutional tax mandate became "law". People are blind
A Constitutional amendment specifically authorizes income taxes, so it's pretty impossible for them to be unconstitutional. Or are are you referencing one of the theories [1] that the 16th amendment was never ratified?
[1] http://en.wikipedia.org/wiki/Tax_protester_Sixteenth_Amendme...
[1] http://en.wikipedia.org/wiki/Tax_protester_Sixteenth_Amendme...
_delirium read the amendment. either way it states clearly that no tax from income should be collected
The amendment reads in full, as follows:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
It quite clearly states exactly the opposite of what you claim.
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
It quite clearly states exactly the opposite of what you claim.
A Constitutional Amendment cannot, by definition, be unconstitutional. Please take your FUD back to reddit or whatever bridge you crawled out from under.
You see there wasn't suppose to be any "Constitutional Amendment" that is exactly the point you moron. Pick up a history book and stop watching fox news
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Well, to be fair, that's typically how the online world works in practice in America.
Really? They don't pay income tax?
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.
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.
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.
It's more complicated than that. Absent SSTP, if I live in a town with a special sales tax, and I buy furniture from the next town over and have it shipped to my house, I get to pay a lower tax rate. With SSTP, they furniture store has to track my address and charge me the higher rate. I don't think use tax has ever been a factor in intrastate sales tax rate variations so this does change what sort of taxes are required.
If I sell something on eBay do I pay income tax on it? No, though I suppose I would if I were selling a whole lot of stuff. Similarly, I don't pay sales tax on things I buy on eBay even though I'm supposed to.
1) eBay reports aggregate sales >$600 to the I.R.S.
2) Most items sold on eBay are sold for less than they were purchased (i.e., anything used), so the likelihood of recognizing gain on any sale is low. No gain recognition = no taxes incurred.
3) Sale of items above (your) purchase price do incur taxable income. If you do not report such income, your tax year never closes. That means there is no deadline as to when the IRS can go after you for penalties and back interest.
4) Sales tax is collected by the seller on behalf of the buyer. You mean "use taxes", which are paid by the buyer himself.
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Without sales tax your income tax would "look insane", and you'd complain just as much. It's just another way to bring in taxes in a way that evenly distributes it among people.
"But I pay other taxes" does not seem like a great excuse for not paying sales tax...
This is about income tax, not sales tax. It being a sale is important because if it weren't one, it would be a gift, and gifts aren't subject to income tax.
Fwiw, the test for gifts under the tax code is payments motivated by "detached and disinterested generosity". So if you get something in return, it's hard for it to count as a gift. It doesn't have to even be a sale per se; for example, tipping at a restaurant is technically a voluntary payment for which you receive nothing in return, but it's not considered sufficiently detached/disinterested to count as a gift.
Tips are explicitly taxed as income to the recipient. They are not regarded as gifts by any taxing authority in the U.S.
That's what I was arguing, that you can't classify something as a gift just because technically there is no exchange of consideration. Even though tips formally have no consideration, they still fail the detached/disinterested test, and count as income.
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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.
- 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.
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.