

Crowdfunded businesses may owe taxes, too - eplanit
http://www.reuters.com/article/2012/08/13/us-column-feldman-crowdfunding-taxes-idUSBRE87C0F120120813

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daemon13
This whole article reads kind of bullshit from US GAAP perspective.

In case people who pledge will receive tangible goods in exchange, of course
it is a sale. But these pledges will be accounted for as as prepayments in the
start-up's books.

The sale most probably will be recognized when the goods will be
shipped|delivered and will be offset with cost of goods sold.

R&D expenses are completely different matter, and will be expenses or
expensed/capitalized based on applicable accounting/tax policies.

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einhverfr
Yeah. Additionally any article you'd get there will oversimplify to the point
of mostly offering an admonishment to check with an accountant.

As a business typically you are going to pay for net income. Calculating net
income is going to be difficult in this case because it depends on what you
are raising money to do.

Raising $500k to pay some experts to go develop the world's best pizza recipe
in a year? Do this the same year as the fundraising? If you can spend all of
the money you raise on bona fide business expenses (but see amortization
below!) then it isn't going to raise your tax liability at all.

Similarly suppose it is for a pizza oven. Now we get into the complications.
Do the tax laws (we are talking tax accounting not GAAP or financial
accounting here) allow you to take the whole thing off the first year? or are
you required to amortize the cost at a specific schedule? Irrespective of the
ability to do so, would you prefer to amortize over a specific schedule with
the idea that you save up for a replacement? Now you get all the questions
that matter and the answer as to whether it raises your taxes or not are not
at all straightforward.

The real lesson should be "talk with your accountant but also learn the basics
yourself."

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rprasad
You're confusing the issue.

Capital is never taxed as income under the U.S. income tax code. Ergo, the
money raised in your example would never subject the business to income taxes.

 _Prepayments_ of revenue, i.e., for goods or services that will be provided
in the future, are income and are taxed as income. Ergo, if you collect
prepayments of $500,000 from pizza-lovers to sell them the pizza that you will
develop using their money, the net would be taxed.

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einhverfr
Capital (equity) and net income (income - expense) are separate. It is
possible, as you point out, for for taxes to be affected and this is what I am
getting at. Something can affect equity and assets without affecting net
income but net income _always_ affects equity and assets.

As for prepayments, assuming you aren't one of the rare cash-basis filers, it
will be deemed income at the time goods are delivered (and is technically a
loan before that point since you have a debt (the goods to deliver) to the
customer and if you have to refund the money you may yet have to do so.

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jlarocco
This seems pretty obvious. If you're raising money and you're not a non-
profit, then you're going to owe taxes.

~~~
jcoder
As I read the article, it's _not_ about raising money---it's about the
exchange/the transaction. By offering "rewards" on KS, you're making a sale.

~~~
einhverfr
The point has to do with what you are exchanging. In general you are going to
only gain money in these cases in one of three ways:

1) Sale of a good or service (direct or indirect). This is income and if
income exceeds expense, will increase taxable income. If income does not
exceed expense then as a fundraising effort it is a failure.

2) Sale of equity. This is not income. It's a straight asset/equity swap. This
can be done crowdsourcing too due to recent regulatory changes.

3) Sale of promissory notes. This is not income. It's a straight
asset/liability swap. I would be surprised if you could go out and sell bonds
on street corners but if you could it too would not be income unless you were
paying back less than what you sold it as which isn't usually the way these
things world.

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rprasad
Actually, you just provided 3 taxable transactions.

The sale of equity is taxable as income to the seller. I believe you actually
mean the issuance of stock by the corporation in exchange for contributions of
cash or other property to the corporation. This is not a sale, nor is it
taxable. See Sec. 351.

The sale of debt is income to the seller. I believe you mean the issuance of
debt by the corporation in exchange for a loan of cash or liquidable assets.
This is not a sale.

Note that income is not a matter of gain or loss. You can sell something for a
loss and still have income. However, gain or loss is relevant to the
determination of how much in taxes you pay for the year. That discussion could
fill entire hard drives.

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greenback
"It it's a sale, it's taxable". Where does the money go? Wait... I already pay
1000 different taxes every day.

We should just blindly accept whatever politicians tell us to do.

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rosser
In what world is _selling something_ not going to incur a tax liability?

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propercoil
In the world before 1913 when the unconstitutional tax mandate became "law".
People are blind

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_delirium
A Constitutional amendment _specifically_ authorizes income taxes, so it's
pretty impossible for them to be unconstitutional. Or are are you referencing
one of the theories [1] that the 16th amendment was never ratified?

[1]
[http://en.wikipedia.org/wiki/Tax_protester_Sixteenth_Amendme...](http://en.wikipedia.org/wiki/Tax_protester_Sixteenth_Amendment_arguments)

~~~
propercoil
_delirium read the amendment. either way it states clearly that no tax from
income should be collected

~~~
_delirium
The amendment reads in full, as follows:

 _The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among the several States, and
without regard to any census or enumeration._

It quite clearly states exactly the opposite of what you claim.

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rprasad
It depends. This is how the US federal income tax code would probably treat
the issue:

\- If the business is an S-Corp or a Pass-through (i.e., LLC or partnership),
then it reports income when funds are received. Individuals and pass-through
entities are cash method taxpayers, so they report income when received, not
when earned.

\- However, if the business is a C-Corporation, they report income when the
transaction is completed. C-corps are "accrual" method taxpayers, so they
report income when actually earned regardless of when actually received.

This does not mean the business actually owes taxes on the income, since
businesses are taxed on net income, i.e., profits remaining after expenses,
credits, and various deductions are deducted from revenues.

