Crowdfunding - Iowa State University...• Crowdfunding revenues must generally be included in...

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Center for Agricultural Law & Taxation

Crowdfunding

Kristy Maitre- Tax Specialist

Center for Agricultural Law and Taxation

May 9, 2017


Crowdfunding

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Crowdfunding - The Completion of the Statue of Liberty was Crowdfunded over One Hundred Years Ago

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Statue of Liberty – Wikipedia

• Fundraising for the statue had begun in 1882

• Fundraising proved difficult, especially for the Americans, and by 1885 work on the pedestal was threatened due to lack of funds

• Grover Cleveland, the governor of New York, vetoed a bill to provide $50,000 for the statue project in 1884

• An attempt the next year to have Congress provide $100,000, sufficient to complete the project, also failed

• Publisher Joseph Pulitzer of the New York World started a drive for donations to complete the project

• After five months of daily calls to donate to the statue fund, on August 11, 1885, the World announced that $102,000 had been raised from 120,000 donors, and that 80 percent of the total had been received in sums of less than one dollar

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Crowdfunding

• The pooling of money and other resources to fund projects by raising funds through small contributions from the general public

• It can also be a source of alternative finance

• Social networking taken to the next level – give money

• In 2015, it was estimated that worldwide over $34 billion (US dollars) were raised through crowdfunding

• The concept can also be used through mail-order subscriptions, benefit events, and other methods but for the most part the funding is accomplished via Internet

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Three Actor Models

• Project initiator who proposes the idea and/or project to be funded

• Individuals or groups who support the idea

• A "platform" that brings the parties together to launch the idea

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Possible Ventures

• Crowdfunding has been used to fund a wide range for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects

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Medical Expenses

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Possible Ventures

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Equity Based Crowding Funding Law

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Jumpstart Our Business Startups Act

• Intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations

• It was signed into law by President Barack Obama on April 5, 2012

• Title III, also known as the CROWDFUND Act, has drawn the most public attention because it creates a way for companies to use crowdfunding to issue securities, something that was not previously permitted

• On October 30, 2015, the SEC adopted final rules allowing Title III equity crowdfunding

• These rules went into effect on May 16, 2016

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What Jumpstart Our Business Startups Act Provided

• Intermediaries, connecting companies and investors

• Certain information will need to be disclosed to qualify a company to participate in the act

• The legal status of the company

• The names of directors and officers

• A description of how the funds raised will be used

• How the price of the company's stock was determined

• The company's capital structure, and

• Legal terms associated with the securities being sold 12

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What Jumpstart Our Business Startups Act Provided• Other information will be required based on the amount of money a

company is looking to raise:

• A company seeking $100,000 or less must provide

• An income tax return for the most recently completed year, certified financial statements

• A company seeking $100,001 to $500,000 must provide financial statements that have been reviewed by an independent public accountant in accordance with "professional standards and procedures" or specific procedures that the SEC establishes specifically for this purpose.

• A company seeking more than $500,000 are required to provide audited financial statements

• Annual reports on operations and financial statements13


Small Business

• Crowdfunding will give entrepreneurs and owners of existing businesses a new means of raising capital

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Top 10 “Platform” Sites

• gofundme

• Kickstarter

• Indiegogo

• teespring

• Patreon

• Youcaring.com

• Crowdrise

• DonorsChoose.org

• Kiva

• Giveforward 15

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Platforms

• Platforms typically charge a fee of 7% to 12% of funds raised

• Platforms are geared generally to one particular type of crowdfunding, so a review of the sites should be made

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Planning

• Preparations to Launch a Crowdfunding Campaign

• Start Gaining Support & Building Momentum

• Make an Awesome Presentation

• Selecting Rewards

• Making a Video

• Choose a Platform

• Prepare for Launch

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Information Letter 2016-0036

• Reg. § 1.451-2 sets out the constructive receipt doctrine

• Income, although not actually reduced to a taxpayer’s possession, is constructively received by him in the tax 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 tax year if notice of intention to withdraw had been given

• The regulations further provide that income isn’t 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 doesn’t legally defer recognition of that income

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• IRS concluded that generally, money received without an offsetting liability (such as a repayment obligation), that is neither a capital contribution to an entity in exchange for a capital interest in the entity nor a gift, is includible in income

• The facts and circumstances of a particular situation must be considered to determine whether the money received in that situation is income

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• What that means is that crowdfunding revenues generally are includible in income if they are not:

• 1. loans that must be repaid;

• 2. capital contributed to an entity in exchange for an equity interest in the entity; or

• 3. gifts made out of detached generosity and without any “quid pro quo”

• However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes

• Crowdfunding revenues must generally be included in income to the extent they are received for services rendered or are gains from the sale of property

• Thus, IRS determined that the income tax consequences to a taxpayer of a crowdfunding effort depend on all the facts and circumstances surrounding that effort .

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Three Models + Hybrids

• Reward - entrepreneurs presell a product or service to launch a business concept without incurring debt or sacrificing equity/shares

• Donation –charitable or social sponsorship/programs

• Equity - backer receives shares of a company, usually in its early stages, in exchange for the money pledged

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Reward Based

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Reward Based

• Raise capital through online platforms

• Geared toward startups

• By-passes traditional small-business loans Anyone can contribute to a reward campaign

• Donations are often small

• Money raised doesn’t have to be paid back, but in return for donations, businesses provide rewards

• For example – a writer may reward a contribution with a signed copy of the book once published if they contribute $100+ or a simple thank-you note

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Reward Based - Pros

• Least costly way to raise capital

• Fees are a percentage of the money raised

• The project creator selects the reward

• No collateral, credit check or previous experience needed

• Process is simple

• Businesses don’t give away company shares as with equity crowdfunding

• Exposure gained on the platform establishes a customer base and brand awareness

• Feedback from donors is valuable for future product development

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Reward Based - Cons

• Not suitable for funding beyond about $100,000

• If the goal is not reached funds may have to be forfeited

• Exposing an idea online may put the business at risk of having it stolen and marketed by someone else

• Rewards-based crowdfunding works well for business-to-consumer ideas but doesn’t seem to be effective for business-to-business campaigns

• Overly technical or complex ideas may be difficult to sell

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Reward Based and Tax Issues

• The Internal Revenue Code and IRS guidance do not address crowdfunding, leaving several possibilities for how it should be treated for tax purposes

• Note that crowdfunded activities may be subject to other taxes, notably, sales and use taxes

• Amounts received through reward-based crowdfunding campaigns most likely are taxable income under Sec. 61, to be reported by the creator in the year of receipt

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• Several factors must be considered

• Whether the crowdfunding activity is deemed a trade or business or a hobby

• Whether the activity is deemed a startup business

• The method of accounting used by the creator

• The value of rewards given to backers

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• Trade or Business vs. Hobby

• If the activity is deemed a trade or business, all otherwise allowable trade or business expenses should be deductible against the income

• If, however, the activity is deemed to be a hobby, only expenses to the extent of the income will be deductible

• A facts-and-circumstances determination

• The hobby limitation applies to individuals, partnerships, S corporations, estates, and trusts, but not to C corporations

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• A hobby has nine factors which are generally considered

• Is the business is run in a businesslike fashion

• Does the owner have experience or knowledge in the business area

• Is the activity carried on for recreation or personal purposes

• The time and effort

• Expectation that the assets may appreciate in value

• Taxpayer success in other ventures

• The history of income, losses, investment and valuation

• Relative amounts of profit and losses

• Financial status of taxpayer

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• Startup Trade of Business

• A taxpayer must capitalize these costs unless the taxpayer makes an election under

• § 195 for startup costs

• § 248 (corporations)

• § 709 (partnerships)

• Start-up or organizational costs can be deducted up to $5,000 reduced by the amount by which they exceed $50,000

• The deduction is taken in the year the trade or business becomes active (for startup costs) or the partnership or corporation begins business (for organizational expenses)

• The remainder of the startup costs are amortized over a 15-year period beginning in the month in which the trade or business becomes active or the corporation or partnership begins business 30

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• A taxpayer is deemed to make the election to deduct and amortize these expenses unless it affirmatively elects to capitalize them on the return in which the trade or business activity begins or the entity begins business

• For startup or organization costs to be deducted at all, the activity must be considered an active business

• Conducting a crowdfunding activity alone may not be considered engaging in an active business, therefore crowdfunding expenses may not be deductible until a later year, when the business begins its active business

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Reward Based and Accounting Issues

• Platforms often warn backers (those that donate) that the websites do not guarantee the completion of the project or the delivery of the reward

• The creators receive the funds, have complete control over them

• Under the claim of right claim-of-right doctrine, this income is taxable in the year of receipt regardless of the accounting method

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Value of the Reward

• The award can be difficult to value

• Certain funds might be classified as a nontaxable gift

• A gift is generally defined for federal income taxes as an amount transferred out of "detached and disinterested generosity"

• Gift treatment would be disallowed where the reward has a value approximately equal to or greater than the contribution in return for the payment

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Donation Based Crowdfunding

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Donation Based

• Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to donate a small amount

• Similar to Rewards based funding

• Donation-based crowdfunding can also be used in an effort to raise funds for charitable causes

• Because this sort of crowdfunding is predicated on donations, funders do not obtain any ownership or rights to the project, nor do they become creditors to the project

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Donation Based

• Donations to an individual are considered taxable income if they are not gifts, loans or equity investments

• Using a website to raise money for personal causes such as paying for medical expenses for a pet or sending a child to summer camp, these donations are considered gifts as long as the donor does not receive anything in return

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Donation Based - Tax

• Many donation-based crowdfunding campaigns also give donors something in return for their contribution, similar to reward based crowdfunding

• Unless the recipient of the contributions has tax-exempt status, contributions received through crowdfunding platforms may be considered taxable income

• Also, many people who contribute to the donation based assume there is a tax deduction connection

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Donation Based - Example

• Sally while trolling the internet, finds a site to assist with medical bills for a child hurt in an accident or

• Sally stops by the local gas station to pick up milk and spies a coffee can requesting donation to assist with medical expenses or funeral expenses

• Both contributions would not be deductible by Sally as they were not given to a qualified charitable organization

• Many times these types of donations are considered gifts and if used to pay for the need described and would be nontaxable 38


The Process

• Chose a platform – a crowdfunding site to advertise and promote the cause – the storefront to engage the audience to donate

• The platform will generally send out alerts or newsletters to promote the options to donate on the sites

• Each site has a fee, a percentage of the donation

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Let’s Examine – Gift Tax

• The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not

• The gift tax applies to the transfer by gift of any property

• You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return

• If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift

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Annual Exclusion for Gift Tax

• The annual exclusion for gifts is:

• $11,000 (2004-2005)

• $12,000 (2006-2008)

• $13,000 (2009-2012) and

• $14,000 (2013-2017)

• It is doubtful that someone would give a lump sum of this amount which would require the donor to file a gift tax return

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Recommendation

• Keep all receipts and documentation to support any non-taxable issue

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Equity Based Crowdfunding

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Equity Based Crowdfunding

• The backer receives shares of a company, usually in its early stages, in exchange for the money pledged

• The company can be for profit or non-profit

• There is a certain amount of risk involved as most contribution are made by non-accredited investors

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How It Works

• Source of capital – alternative to traditional loans and raising capital

• Similar to micro financing

• Relies on large groups of people to contribute modest amounts of money to support a business in exchange for a share of the company with the expectation of a return

• Was illegal in the United States until Congress passes the “JumpStart Our Business Start-Up Act of 2012,” which created an exemption for equity crowdfunding if certain criteria has been met 45

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JumpStart Our Business Start-Up Act of 2012• Create to stimulate the growth of small business

• Legalize the effort to allow investors to invest without certain SEC restrictions through “public” means

• The SEC focused on accredited investors, who were licensed and registered with SEC

• This required small businesses, using crowdfunding, to verify that each investor was actually accredited and that they were within the funding limitations put in place by JOBS Act

• Burdensome46


Title III of the Act

• Created an exemption for crowdfunded securities which amended the Securities Act of 1933

• The provision permits the sale of securities to an unlimited number of non-accredited investors without registration, provided all transactions are made through registered-broker dealers or SEC licensed “funding portals” – legalizing non-accredited investing on a large scale

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Conditions

• A non-accredited individual investor is defined as one who has a net worth less than $1 million and who earned less than $200,000 annually ($300,000 with a spouse) in the past two years

• The maximum amount of capital they can accrue is limited to $1,070,000 million in a 12 month period

• Background checks are required for those who own 10% or more of the company

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Conditions

• Must have a business plan

• A description of ownership and capital structure

• Description of the risks involved in investing

• For those investors making less than $107,000 per year, the investment is capped at $2,200 or 5% of their annual income, whichever is greater

• For investors who make $107,000 or more, the investment is capped at 10% of their annual income with a maximum investment of $107,000

• In addition, the “funding portals” are required to run background checks on each start-up company

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Other Conditions

• Investors are allowed to fund multiple companies as long as they abide by the rules and

• They must wait a minimum of 12 months before selling the securities, unless the sale is to a family member, issuing company, or accredited investor

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Other Means of Financing

• Companies can still pursue other methods of financing without these restrictions

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Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers• https://www.sec.gov/info/smallbus/secg/rccompliance

guide-051316.htm

• The above guide provides backgroundnd additional information on equity crowdfunding

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Capital Gains/Capital Losses

• When the equity is sold – a loss or gain has to be determined

• Long-term or short term

• Rates can vary depending on other income

• Losses are limited to $3,000 per year MFJ or $1,500 MFS

• Carryover provisions are still in force

• If the investor dies before full recovery, the loss dies with them

• From 1040 Schedule D or Form 894953


Polling Question

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The Scoop – Upcoming Dates

• May 17

• May 31

• June 7

• June 21

• July 5

• July 19

• August16

• August 30

• Held at 8:00 am and 12:00 pm Central time

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Upcoming Seminars – Mark Your Calendar – Final Dates

• May 11-12, 2017 Back to the Basics: A Foundational Income Tax Return Preparation Course – Live and Webinar

• September 21, 2017 Ag Law Seminar, Live and Webinar

• September 22, 2017 Farm and Estate Tax Review, Live and Webinar

• S Corporation – July 20-21, 2017, Live and Webinar

• Retirement and Social Security Issues(Webinar) = October 10-11, 2017

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Back to the Basics: A Foundational Income Tax Return Preparation Course – Live and Webinar

• May 11-12

• Live and Online

• As new income tax return preparers enter the profession, they must quickly build a solid foundation of basic skills

• Some experienced tax preparers—driven by a need to continually produce—may also wonder if they have some holes in this all-important foundation

• In response to this need, CALT is offering a new two-day introductory course focused on teaching the basics of federal income tax return preparation

• Our “Back to the Basics: A Foundational Income Tax Preparation Course” will teach basic tax return preparation skills all tax return preparers must know

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Back to the Basics: A Foundational Income Tax Return Preparation Course – Live and Webinar

• Attendees will receive two days of federal individual income tax return preparation training, as well as the opportunity to complete a comprehensive return from beginning to end

• Whether you’re new to the profession or simply looking for a comprehensive refresher, we think this course will be of value.

• You’ll experience personal interaction with knowledgeable instructors excited about the material and willing to field all types of questions

• This is a great program for new employees needing training in first and second-year tax law and procedures

• It should also serve as an excellent comprehensive refresher for others

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Back to the Basics: A Foundational Income Tax Return Preparation Course – Live and WebinarThe interview process and tips for conducting an interview Who must file

Determination of filing status, including a review of advantages and disadvantages of each

Exemptions/Dependents rules and changes

Taxable and nontaxable income - where to report Form 1040, line by line

Adjustments to Income Domestic Production Activity Deduction

Standard Deduction vs. Itemized Deduction Itemized Deductions

Various Tax Credits including Child Tax Credit, Earned Income Tax Credit and the American Opportunity Tax Credit, along with associated forms.

Due Diligence Requirements for Credits

Child and Dependent Care Credit Premium Tax Credit Overview

Schedule C Depreciation

Schedule E Business Expenses

Schedule F Standard Mileage vs. Actual Expenses

Bonus Depreciation Form 4562

Sale of Business Assets and Form 4797 Capital Gains and Losses, including Schedule D and Form 8949

Casualty Loss Comprehensive Hands-On Problem59


The Schedule is Finalized for the 44th Annual Federal Income Tax Schools

• November 2-3, 2017 – Maquoketa, Iowa – Centerstone Inn and Suites

• November 6-7, 2017 – Le Mars, Iowa – Le Mars Convention Center

• November 8-9, 2017 – Atlantic, Iowa – Cass County Community Center

• November 9-10, 2017 – Mason City, Iowa – North Iowa Area Community College

• November 16-17, 2017 – Ottumwa, Iowa – Indian Hills Community College

• November 20-21, 2017 – Waterloo, Iowa – Hawkeye Community College

• December 11-12, 2017 – Ames, Iowa and Live Webinar – Quality Inn and Suites

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Up Coming Webinars

• May 16 – Understanding the Employer Identification number

• June 6, 2017 – Ethics part 1 and 2

• June 8, 2017 – Form 3115 Part 1 Overview

• June 13, 2017 Form 4797 Sales of a Business Asset

• June 14, 2017 ACA – Where are we at with Repeal and Replace

• June 15, 2017 – Form 3113 How to Do a 481(a) Adjustment – Part 2 of the Form 3115 61


The CALT Staff

• Kristine A. Tidgren

• Assistant Director

• E-mail: [email protected]

• Phone: (515) 294-6365

• Fax: (515) 294-0700


The CALT Staff

Kristy S. MaitreTax SpecialistE-mail: [email protected]: (515) 296-3810Fax: (515) 294-0700

Tiffany L. Kayser

Program Administrator

E-mail: [email protected]

Phone: (515) 294-5217

Fax: (515) 294-0700

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A Good Reason to E-File

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Crowdfunding - Iowa State University...• Crowdfunding revenues must generally be included in...

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