Start-up businesses picking up cash through crowdfunding web sites could find the US tax man looking for a share of the take.
The Internal Revenue Service (IRS) argues that donations without commitment through the sites are income not investment – and should be taxed as earnings.
Crowdfunding web sites claim the proposal is a tax on entrepreneurs and fresh start firms who struggle to raise cash.
The news broke at the head of National Small Business Week in the States.
The crowdfunding website Kickstarter is the target of IRS investigations. In around four years, the website has funnelled $642 million in pledged cash for more than 100,000 projects. Now the tax man wants a slice of the corporate pie.
Kickstarter under scrutiny
The IRS has issued a guide explaining how Amazon Marketplace, the online service that facilitates Kickstarter pledges, will send tax disclosure forms to entrepreneurs and their business associates demanding details of any project collecting more than $20,000 from 200 donors.
Kickstarter works by taking small cash promises from large numbers of small investors. The entrepreneur sets a financial target for the project. If the money is pledged, the project goes ahead.
The investors often receive no share in the company or business, just recognition of their generosity sometimes marked with a freebie or discount vouchers.
Most of the projects are in the technology, creative and media markets that are notoriously difficult to fund. They involve developing new web services, films, books and movies.
However, IRS lawyers are hedging their bets, claiming they have not yet decided for sure that pledges are income, according to the Wall Street Journal.
Start ups stifled
The issue is whether the crowdfunded money is ‘nominee income’ – which the IRS wants reported on a Form 1099-K that Amazon will send to business owners for the IRS.
The IRS argues that simply filing a 1099-K does not make money collected from pledges taxable, but does show the IRS the extent of any finance received by the business.
If the IRS decides the cash is income, Amazon will withhold 28% of the funds from the business, leaving a severe dent in the start-up budget.
In a financial world that already makes financing difficult for start-ups, the IRS could stifle many small businesses desperate for money.
Crowdfunders fear donations will dry up if the IRS is taking a cut – and entrepreneurs will have to rework their budgets to take account of more than a quarter of their cash going to the tax man.