On April 1st, 2013, Kickstarter released a “tax guide” for project creators that will lead thousands of creatives to fall under IRS tax audits as well as their contributors. The tax guide started with the best intentions, but the execution is beyond wrong. This is a WARNING to all Kickstarter creators and contributors to be very wary of taking any advice they provided. Dissecting Kickstarter’s Tax Guide Everything is Income It’s unfortunate the Kickstarter’s tax guide didn’t end their tax advice at the first sentence. “In general, funds raised on Kickstarter are considered income.” This is the beginning and end of the tax guide. After this sentence is where the “stuff hits the fan.” Kickstarter Campaigns Are NOT Businesses In general, a creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes. This is not true. This statement assumes that you’re a business under tax law. A business under the IRS’ definition has specific requirements. The easiest test to meet the business requirements is to generate a profit for 3 years out of 5 years. It’s very common for the IRS to go back and audit taxpayers that misclassified their activities. Accrual Method If a creator receives funding in one year and spends money on their project in a later year, consider whether their expenses can still offset their Kickstarter funding using the accrual method of accounting. Kickstarter confuses General Accepted Accounting Principles (“GAAP”) with tax law. GAAP and tax law are two entirely different accounting systems. It’s like running Window’s on a Mac. It might work, but it’s not pretty and everything breaks pretty fast. Note, there’s a reason why tax forms have sections called “book-to-tax differences” and check boxes that ask whether you’re applying tax basis or GAAP. Tax law requires that you pay taxes currently on advance payments and prepayments. Tax law’s goal is make sure that everyone pays their taxes, when income or cash is received. The IRS does not trust us to save enough money to pay our fair share of taxes months in the future. We can’t blame the IRS’ distrust considering the United States’ average savings account balance is $3,800 dollars based on the US Census Bureau.
