So watch, software, book web, TV, films , game and music campaigns are typically all pre-sales campaigns with the proceeds being taxable. The cost of providing the rewards is normally deductible, depending on your jurisdiction and local circumstances. This becomes more complicated if the time between contribution and delivery crosses a tax year/quarter/month.
Charitable donations: the challange is the rewards. Because there is a reward, most charities including those with tax deductible status cannot offer the tax deduction. This must be checked in every jurisdiction. However if the charity does not pay tax on its earnings then pre-sales is the way to go.
Gray area: Where a film offers a DVD/digital download plus a credit/thank you and some other intangible. A case may be made that the DVD/download is taxable but everything above that is a donation. Again that depends on the campaign and tax jurisdiction.
We know, Pre order / reward base CrowdFunding would require issuer to pay income taxes on his or her net profit just like any other business. The standard formula is :
Sales - Cost of goods sold = Gross profit
Net profit = Gross profit - over head and expense ( certain expenses in crowd funding that would be treated as capital expense and therefore not fully deductible in the year incurred. Ask your CPA )
Tax = CrowdFunding reward and donation based campaigns flow through your P&L to taxable Net Income.The area that needs to be studied is the area of R&D . One must also consider that any rewards or product not yet delivered would be considered as a liability for your enterprise. This is exactly why you must discuss a project with a CPA prior to launching a campaign.
The New Sales Tax liability in a crowd funding project also need to seriously considered now more than ever. It is absolutely essential to prepare for collecting sales tax since the Senate just passed the ONLINE SALES TAX bill, which now goes to the house.
We recommend you Call your State Representative now and tell them not to vote for online sales tax while you still have the opportunity. Once it is passed by the House, the President will sign it into law and I will bet every State in the country will demand you collect Sales Tax.
There are still many questions and issues left unanswered :
1- If a project is crowdfunded in the US, but the proceeds will go to a company in Europe, where will the proceeds be taxed and visa versa ?
2- About capital expense: Capital expenses when working on a crowdfunding project. Not to long ago the U.S. Allowed business to defect a capital expense in the entire year inorder to help stimulate the economy.We are not sure if this incentive is still available for a small business.
3- We believe the majority of individuals creating projects have not consulted a business tax accountant for any advice prior to launching a campaign. They could have a very serious financial crisis if they have a successful campaign.
The New Sales Tax liability in a crowd funding project also need to seriously considered now more than ever.