The IRS’s recent fact sheet reminds crowdfunding solicitors of their reporting obligations under the Internal Revenue Code.
Crowdfunding is a web-based method of soliciting contributions from large groups of people. The solicitors of the funds are either organizers on behalf of other people or the beneficiaries themselves. The technique often is employed to assist those in distress and to raise funds for profit-seeking activities.
Eligible recipients?
Before contributing, donors should ask if the recipient is, in fact, a charity?
Learning about eligible, exempt organizations is as easy as accessing the IRS website at www.irs.gov/charities-and-nonprofits. Those organizations eligible to receive deductible contributions will be listed. Do remember that some charities are eligible to receive deductible contributions even though not listed in this database. These include government agencies and houses of worship, like churches, temples and synagogues.
Even if the charity is eligible, donors should be sure it is not earmarking the contributions to specific individuals or families. The contribution will be considered made to the charity, rather than a specific individual, if the charity has full control over the funds. Rev. Rul. 68-484 requires the donor’s intent in making a contribution to be to benefit the charity, not an individual recipient.
Contributions to crowdfunding solicitations are not necessarily a result of the required detached and disinterested generosity. For example, funds given online through a GoFundMe page linked to a specific bank, accessible by a specific sick or injured person will not be deductible contributions since the funds are not held by a qualified charity.
Tax consequences to recipients
The federal tax laws exclude from gross income cash or property if received as a gift. When a crowdfunding organizer distributes money raised on behalf of others, there is no inclusion into its gross income. Nor will the recipient of the funds from the crowdfunding be required to include the distribution into gross income so long as contributions to the fund were made out of detached and disinterested generosity.
Reporting requirements
Beginning in 2022, the threshold for filing a Form 1099-K by a crowdfunding website or payment processor is a mere $600 in gross payments regardless of how few the number of transactions, compared to $20,000 from more than 200 transactions or contributions for prior years.
The expansion of the Form 1099-K reporting requirement may lead to surprises for the recipients.
Firstly, a person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer’s name on the form. That likely means the payment processor, rather than the crowdfunding site itself, filed the form. Confusion can be eliminated by the recipient calling the filer’s telephone number, which is required to be listed on the form. Secondly, the amount shown in Box 1 of Form 1099-K is not automatically taxable. The recipient of this form should be ready to explain why the crowdfunding distributions should not be included in gross income, should the IRS seek more information.
Reporting issues for contributors & organizers
Care should be taken to avoid providing goods and services to contributors through a crowdfunding website or its payment processor. Doing so triggers the requirement of filing Form 1099-K with the IRS. Additionally, distributions of the money raised to the crowdfunding organizer triggers the requirement that a Form 1099-K be sent to the organizer.
Conclusion
The expansion of the 1099-K reporting requirements will create some confusion. It is important for both the solicitors, charities and recipients to keep meticulous records of payments made and received.
By Professor Christopher P. Woehrle, JD, LLM
