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Do Businesses in Virginia Have to Pay Income Tax for Crowdfunding Campaigns?

News, Offshore Account Update

Posted in on August 12, 2022

Crowdfunding platforms have become popular tools for businesses to launch new products and services. Using these platforms allows businesses to secure funding without going into debt or giving up shares to venture capitalists, and it allows them to promote their new offerings in ways not available through other means.

But, when using crowdfunding platforms, businesses need to be careful. Specifically, they need to be careful to ensure that they are meeting their federal income tax obligations. Crowdfunding for business purposes can trigger federal income tax liability, and businesses that fail to report their crowdfunding revenue can face substantial liability in the event of an IRS audit or business tax fraud investigation.

IRS: Business Revenue from Crowdfunding is Taxable Income

The IRS recently published a Tax Tip discussing the tax implications of crowdfunding. While the IRS notes that crowdfunding revenue may not be taxable “[i]f people donate to a crowdfunding campaign out of generosity and without expecting anything in return,” this generally isn’t the case with business crowdfunding endeavors. In fact, in most cases, the opposite is true: People contribute because they want to receive the benefits of their participation, whether in the form of getting their hands on a newly-developed product, gaining early access to a new content, or receiving any “gifts” the business may offer at various contribution tiers.

What if contributors truly are donating altruistically? As a practical matter, this isn’t likely to be the case. But, even if it is, the fact that the business offers rewards (or simply offers to deliver its new product or service when it is ready) is enough to trigger federal income tax liability. When businesses conduct crowdfunding campaigns for their own purposes, they should expect to pay income tax on all contributions they receive—whether styled as “donations,” “reservation fees” or otherwise.

What Are the Risks of Failing to Report Crowdfunding Income to the IRS?

The risks of failing to report crowdfunding income are the same as the risks involved with failing to report any other business income to the IRS. The IRS is paying attention to startups and small businesses, and it has shown particular interest in crowdfunding in 2022 (prior to publishing its Tax Tip in August, the IRS released a Fact Sheet in March). If a business fails to report its crowdfunding income and pay all tax due, it can expect to face scrutiny, and it can expect this scrutiny to lead to liability for back taxes, interest and penalties.

Do you have questions or concerns about your business’s tax liability related to a crowdfunding campaign? If so, you should talk to a tax lawyer who can help you make informed decisions.

Request an Appointment with Tax Attorney Kevin E. Thorn in Virginia

Kevin E. Thorn, Managing Partner of Thorn Law Group, is a tax attorney who has over 20 years’ experience helping businesses deal with the IRS. If you have questions about crowdfunding, you can call 703-752-3752, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.

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