Recently, I had a call from a client who made charitable contributions to an online site and wanted to know if those funds were tax deductible. These online sites, according to the client, request donations for medical procedures or to help children and families through a struggle.
These online sites facilitate a practice called “crowdfunding,” which aims to raise monetary contributions from large groups of people through the internet for common services, projects, products, causes, or experiences. A few crowdfunding projects have been featured in headlines like the Foo Fighters Crowdfunded Show in Richmond, VA or the current campaign for a new Broken Lizard movie. There are hundreds of crowdfunding sites with tons of people asking for money for various causes. Some individuals have legitimate charitable positions and concerns. Some setups are from businesses asking for money to help the business grow. Others ask for money toward common services or experiences like buying a new bra, earning a fantasy honeymoon, or funding a dream trip for their child.
While I am sympathetic to people needing money for medical expenses or to put food on their table, it is important to understand that these are private individuals making these requests on these sites. Most crowdfunded sites are very clear about that. The FAQs on GoFundMe even state that contributions are considered to be personal gifts.
To qualify as a charitable contribution, a donation must be given to a "qualified charitable organization." According to the IRS, this means a non-profit group that is either religious, charitable, educational, scientific, or literary in purpose, or one that works to prevent cruelty to children or animals. Typically these organizations are classified as "501(c)(3)" or "501(c)(4)" organizations for tax purposes. It is important to note that 501c organizations set up crowdfunding campaigns as well and you must scrutinize the campaign you are funding to see if it is going to a qualifying organization.
Your donations to the people or for-profit businesses on crowdfunding sites are just like giving your friend a check for his or her birthday. Individuals and businesses across crowdfunded sites are not recognized non-profit organizations for tax purposes. You can give to them to your heart's content, but these donations cannot be written off for tax purposes.
For those setting up a campaign on a crowdfunded site, depending on how your (or your business's) tax classification, you may have to report those funds received as income to the IRS. Technically, money received without an offsetting liability, that is not a capital contribution or a gift, is taxable. According to the crowdfunding sites, these donations should be treated as (non-taxable) personal gifts. For an amount like $50, the lack of clarification in the law about this seems trivial. But what if that gift is $2 million dollars? It is best to give me or your local tax advisor a call for clarification.
One thing is for certain, if the gifts you receive from the site produce income, the income you make is not tax-free. In other words, if you receive $100 to make a home movie, but your movie sells to your neighbors and produces $900, that $900 amount is taxable. You are required to report any money you make as a result of these gifts as income to the IRS.
Ray Nations, EA
If you find yourself in the lion’s den with the IRS,
Call Ray Nations, Enrolled Agent, to tame that mess!