67 th Annual Program of the WV Tax Institute. Crowdfunding. Harley Duncan. October 24, 2016

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1 67 th Annual Program of the WV Tax Institute Crowdfunding Harley Duncan October 24, 2016

2 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

3 Agenda Brief Background to Crowdfunding What is Crowdfunding and Examples Types of Crowdfunding Size and volume of the market Federal Tax Implications Crowdfunding Website, Third Party Donee Donor - Estate and Gift Tax Implications Securities Act of 1933 JOBS Act of 2012 State Tax Implications Sales and Use Other State Tax Implications Closing Thoughts 3

4 What is crowdfunding? Collectively, fundraising efforts that involve the use of the Internet to appeal to potential donors who might support the fundraiser s purpose, as with charitable undertakings, artistic endeavors, political campaigning, research and development, etc. - Black s Law Dictionary Crowdfunding relies on small contributions from many different entities to finance a project. Raising money from relatively small investments, contributions, loans, or donations from a large number of people. 4

5 Crowdfunding starts with an idea by the donee then, the donee works with a crowdfunding website and reaches out, using social media, to donors who will back or help finance the project. Donee Has an idea Crowdfunding website Donee works with a crowdfunding site Donors Contribute and help fund the project 5

6 Third Party Websites Help to Facilitiate Crowdfunding Between Donors and Donees Kickstarter GoFundMe HoneyFund Crowdrise Teespring Indiegogo Patreon YouCaring Kiva Crowdfunder 6

7 Different Crowdfunding Types and Models Equity State or Equity Crowdfunding Solicit many small, individual investments in exchange for equity securities without having to register with the SEC Share of Product Pure Gift or Donation-Based Crowdfunding Solicit donations for charitable causes or personal goals or needs - GoFundMe Rewards-Based Crowdfunding Solicit contributions in exchange for future goods or experiences - Kickstarter or Indiegogo Debt-Based Crowdfunding Peer-to-Peer crowdfunding where lending sites allow individuals to apply for unsecured loans, financed by individual investors who earn interest on each loan 7

8 Crowd Funding Statistics Over 10 million people have backed a Kickstarter project with pledges of approximately $1.6 billion. Crowdfunding Growth In 2010, the crowdfunding market was reported to be $880 million In 2014, the crowdfunding market grew to $16 billion In 2015, the estimated crowdfunding market growth was over $34 billion 8

9 Federal Tax Implications of Crowdfunding Crowdfunding Website

10 Federal Tax Implications of the Crowdfunding Website What type of entity is the crowdfunding site? Non-profit For profit What types of fees does the crowdfunding site charge the donees? Percentage based Flat fee Hybrid 10

11 Federal Tax Implications of the Crowdfunding Website (continued) 1099-K: The crowdfunding website may have an obligation to send a Form K to the any donee who has registered 200 annual transactions totaling at least $20,000 Only 15% of the 22,252 projects financed on Kickstarter in 2014 passed that threshold The Form 1099-K helps the IRS to track online contributions from a crowdfunding campaign depending on the size and amount 11

12 Federal Tax Implications of Crowdfunding Donee

13 Federal Tax Implications of Crowdfunding for the Donee IRS Information Letter IRS explains that the tax treatment of crowdfunding is viewed as income inclusion. I.R.C. 61(a), except as otherwise provided by law, gross income includes all income from whatever source derived. Reg sets out the constructive receipt doctrine and provides that income, although not actually reduced to a taxpayer s possession, is constructively received by him in the tax year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the tax year if notice of intention to withdraw had been given. Whether to report the money received as income or as a gift Websites like Kickstarter and GoFundMe offer a hybrid system where backers can make a donation or receive a reward for their donation. If the campaign organizer reports all their received money as income, then they are missing out on the tax benefits of the gift exclusion under 102. To be viewed as nontaxable, the gift must be given out of detached and disinterested generosity for personal reasons and without the expectation of getting something in return. 13

14 Federal Tax Implications of the Donee (continued) Traps for the Unwary Donee: Whether there is specialized tax treatment due to the exchange of certain products or rewards from the crowdfunding campaign Whether the transactions associated between the donee and donors are similar to the sale of goods or services as an online retailer IRS may issue a deficiency and penalties to the done if they do not properly report If the donee has benefitted from a transfer in excess of $20,000, then the crowdfunding website may issue an IRS Form 1099-K 14

15 Federal Tax Implications of the Donee (continued) Traps for the Unwary Donee (continued): Whether the funds received are being used to pay employees. Sometimes, organizations use crowdfunding to raise money which they then use to pay their employees. These payments would be taxable income subject to all the typical employer and employee taxes. Whether the contributions are considered loans that need to be repaid Whether the donations are considered capital contributions to an entity in exchange for an equity interest in the entity Whether the contribution was made out of detached generosity and without any quid pro quo 15

16 Federal Tax Implications of Crowdfunding Donor

17 Federal Tax Implications of Crowdfunding for the Donor Charitable Contributions Whether the donee and crowdfunding site have structured the crowdfunding campaign in a way that: Allows donors to qualify for a charitable deduction Whether it is a gift to benefit a specific person Whether it is a deductible gift that is made to a qualified charity If the donation is over $250, whether there is a contemporaneous written acknowledgment from the charity If the crowdfunding site and donee are not properly structured for the donor s benefit, then the donor may want to instead contribute directly to the charitable organization rather than through the third party to dispel any potential confusion. For example, the donor may not qualify for a medical gift exclusion if the gift was made through the third party vendor site. 17

18 Estate and Gift Tax Implications Estate Tax The 2016 estate and gift tax limits are $5.45 million for individuals and $10.9 million for married couples Individuals are able to leave up to $5.45 million to his/her heirs without being tacked with a federal estate or gift tax The top federal estate tax rate is still 40% Gift Tax The 2016 annual gift tax exclusion is $14,000 A taxpayer can give away up to $14,000 to as many individuals as they like and the annual gift tax exclusion will not count towards the lifetime gift exemption Some donors take the position that a crowdfunded contribution to a charity is a nontaxable gift transfer because giving less than $14,000 qualifies fro present interest gift exclusion 18

19 The SEC Act of 1933 and JOBS Act of 2012 on Crowdfunding

20 Securities and Exchange Commission Act of 1933 Securities Act of 1933 Brief Description of the 1933 Act and its interplay with Crowdfunding The SEC allows for limited equity crowdfunding, but only for accredited investors A small number of unaccredited, but sophisticated, investors can participate in crowdfunding offerings 20

21 Jumpstart Our Business Startups (JOBS) Act of 2012 Title III of the JOBS Act amends the Securities Act of 1933 Crowdfunding environment prior to the JOBS Act Aggregate fundraising limits and accompanying disclosures Aggregate annual limits on individual investor contributions Pre-offering and post-offering disclosure requirements Target offering limits and resale restrictions 21

22 State Tax Implications on Crowdfunding

23 Crowdfunding Changes Within the States Intrastate Offerings: Under the SEC Act of 1933, 3(a)(11) exempts completely the intrastate crowdfunding transactions from SEC regulation This provides states the authority to pass their own crowdfunding exemptions 14 states have passed crowdfunding exemptions related to online direct lending or peer-to-peer crowdfunding This means that the following states have exemptions for crowdfunding from securities registration under state law which are tied to federal securities offering exemptions 23

24 14 States Passed Crowdfunding Exemptions - Alabama - Colorado - Georgia - Idaho - Indiana - Kansas - Maine - Maryland - Michigan - Oregon - Tennessee - Texas - Washington - Wisconsin 24

25 Sales and Use Tax Crowdfunding Considerations: Nexus - Does the donee have nexus with the state of the donor? - Is the crowdfunding site a representative of the donee? Taxability - Are rewards provided considered a sale of TPP? Tax Base - What is the measure of the tax base for rewards? 25

26 Sales and Use Tax Implications of Crowdfunding (continued) Sales/Use Tax Compliance - If a sales and use tax applies, the donee will want to have a system where they can calculate the sales tax - Will the crowdfunding website provide the donee with the information of the donor s zip code to help calculate the sales tax? - Will the donee be able to obtain the zip code information from the donor if the crowdfunding website is unwilling to provide it? - How will the donee calculate the correct rate of sales tax for each donor s city or county? 26

27 Other State Tax Implications of Crowdfunding Timing Issues If the crowdfunding campaign starts in December, but the rewards or goods are not shipped until January, then the donee will have business income in one year and expenses to offset the income in the following year Accounting Methods An entrepreneur using crowdfunding may fail to thoroughly consider their accounting methods 27

28 Closing Thoughts on Crowdfunding Likely to continue to see additional guidance on the sales and use tax implications - Correct answer may seem a bit odd and not fit well with the model Income tax questions will likely await IRS guidance which I suspect is not on the high priority list. Future developments likely to be dependent on manner in which the industry develops. What are the new uses for crowdfunding? Other innovative uses to crowdfunding: - Bringing individual investors to the LIHTC market through crowdfunding in order to build up low-income rental markets - Foreign investors using crowdfunding for U.S. real estate purchases 28

29 Questions? 29

30 Thank you Harley Duncan KPMG LLP

31 kpmg.com/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS The KPMG name and logo are registered trademarks or trademarks of KPMG International.

CROWDFUNDING IRS SJSU SMALL BUSINESS TAX INSTITUTE

CROWDFUNDING IRS SJSU SMALL BUSINESS TAX INSTITUTE ANDY MATTSON, CPA, PARTNER CURTIS N. MIYAJI, CPA, SENIOR MANAGER DAWN RHEA, J.D., LL.M, NATIONAL TAX, DIRECTOR JUNE 22, 2017 CROWDFUNDING AGENDA What