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Crowdfunding: A New Source of Business Financing

Are you starting a new business or new venture and need money to fund it?  You might want to check into an online option known as "crowdfunding."  In simplest terms, crowdfunding means many people (the crowd) give you money to fund your venture in exchange for a reward such as a free copy of your product or a small stake in your new business.  As accountants, we were interested in how to treat this money in terms of tax treatment.  Is it an investment in your business? A gift? Taxable income?


Here's a broad overview.

  • Is it an Investment?  In general, under U.S. law, when you offer many "investors" stock or other equity in your business, you're selling securities, and you have to comply with federal and state securities regulations.  The 2012 JOBS Act created a crowdfunding exemption to these regulations, but the Securities and Exchange Commission may still have a say in the matter.

  • Is it a Gift?  Generally, gifts are cash or other consideration you receive from someone who provides the gift freely, with no expectation of getting something from you in return.  Accourding to tax law, when you provide crowdfunders with a reward or other reward in exchange for financial support, the transaction typically will not meet the tax law definition of a gift.

  • Is it Taxable Income?  As long as no equity in your company is exchanged, Crowdfunding money you receive is income, and usually includable on your federal income tax return.   As such, related expenses can be deductible.

If you are a Chicago area business and have questions on Crowdfunding, give Dugan & Lopatka a call at (630) 665-4440.





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