When confronted with a disaster, such as we just experienced with Hurricane Harvey, the generosity of the human spirit becomes apparent as we all ask “What can I do to help?”. For many of you, the answer will come in the form of setting up an online fund raising account to assist in raising money to help a family member, friend or co-worker in need. Many Houstonians are well aware that Houston Texans Defensive End, J.J. Watt, did that with astonishing results. His Hurricane Harvey fundraising efforts via a GoFundMe account raised $41.6 million. But what, if any, tax implications does that have to both the donor and the recipient?
IRS guidance on the use of crowdfunding websites is limited, so definitive guidance is limited as well. Nonetheless, one can apply common tax principles to help determine the tax treatment of both amounts donated and received.
Background on crowdfunding
In general, there are three types of crowdfunding: reward-based, equity-based, and donation-based. This article will only address donation-based crowdfunding, in which an account is established for personal reasons. The reasons may vary greatly (i.e. Aunt Mary has cancer, Johnny is going off to college and needs textbooks, or a co-worker lost everything in an historic flood), but regardless of the reason, they all have one thing in common…the person making the donation has no expectation of receiving something in return.
Unlike reward-based and equity-based crowd sourcing, in which a donor is entitled to receive something of value in exchange for their donation, donation-based crowdfunding does not offer to exchange anything in return for the incoming donation. No services are performed and no tangible or intangible property is provided to the donor.
Matters related to giving
What is the normal result when someone willingly gives something of value away to another person? You guessed it. Due to the personal nature of the transaction and these factors, it appears reasonable to conclude that such a donation would be treated as a gift in the hands of the recipient. Regardless of the dollar amount, a gift is not taxable income to the recipient. So if we can reasonably conclude that the donations are not taxable income to the recipient then, what about any tax consequences, to the donor?
A gift tax is a tax on the transfer of wealth from one individual to another. As noted above, the recipient of the gift is not taxed. Thus, the tax consequence, if any, lies with the donor. Currently, tax law allows you to make a gift of up to $14,000 to any one individual without tax ramifications. This is known as the annual gift tax exclusion. Thus, as long as your donation to any one crowd sourcing account is $14,000 or less, there should be no tax consequence. In addition, if your donations exceed $14,000 in total, it may be wise to ensure that the federal employer identification (EIN) numbers of the recipients are not all the same. That’s because you don’t want to inadvertently trigger a gift tax return filing obligation or have to pay gift tax.
Is it deductible?
Unlike a donation to a 501(c)(3) nonprofit organization, a donation to a personal crowdfunding account is not considered a charitable contribution so; therefore, you will not receive a tax deduction for making the donation. However, if the account you are donating to was set up by a charitable organization, then those donations might qualify for a charitable contribution deduction, depending on if you can get the proper documentation. It’s worth investigating this before you make a donation so you know in advance if the donation will help to reduce your personal income tax or not.
It is important to note that if an account you set up receives more than $20,000 in donations and has more than 200 transactions, expect to receive Form 1099-K that reports amounts to both you and to the IRS. If this happens, you will want to make sure that the 1099-K is properly addressed or you may receive an unexpected letter from the IRS. Thus it is extremely important that you maintain adequate and detailed records supporting amounts received as donations as well as to how the funds were ultimately spent.
If you are planning on setting up a crowd sourcing account or making a donation to one, please be sure to consult your tax advisor. You should feel free to help out Texans who are displaced and suffering in the aftermath of Hurricane Harvey using crowdfunding options or via other traditional charities, churches, and the like. Hopefully, now you’ll feel a little better informed when you do.