I received a 1099-MISC for a crowdfunding campaign that paid out in December 2017 but whose expenses I incurred in 2018. Any way to reconcile that?

[pdandreu]

I raised funds through a crowdfunding platform end of 2017 for a production of a web series in 2018. So, I'm responsible for the taxes on the 1099, but I also paid out money, above even what I raised, which I can't deduct until this coming tax year. I filed an extension, but, with the second deadline looming, I still haven't found a solution.

Sub-question: I read somewhere that if contributors do not receive anything in return, that portion of the funds raised can be considered a gift. I added it all up, and almost half of the money raised was raised through donors who did not select any incentive and, therefore, received nothing in return for their contributions. Could that be a way to mitigate the hit I stand to take?

[Critter]

<a rel="nofollow" target="_blank" href="https://www.journalofaccountancy.com/issues/2015/oct/crowdfunding-and-income-taxes.html">https://www...>

[Carl]

While Critter's response clearly indicates that professional help may be necessary (and I highly recommend it), I can tell you that if the income was reported to you in box 7, then as far as the IRS is concerned, it's self-employment income. You will report it as such on your 2017 return. You flat out will not be able to offset the taxability of that income until the year you do something with it, that is a tax deductible business expense.
Now if the income is reported in box 3 of the 1099-MISC, then without question you should seek professional help. Basically, box 3 income is taxable income. Period. The only way to offset the taxability of it, is to have donated it to a qualified charitable organization in the same tax year you received it. But then, if the money was collected for something like R&D for a product you are inventing or developing, things can be different. So again, professional help is encourage.
Finally, if your state taxes personal income, you've got to deal with reporting the income to your state too.

[pdandreu]

Thank you, Carl. That's very helpful. Thanks for the information, Critter.

[pdandreu]

Thank you, Carl. That's very helpful. Thanks for the information, Critter.

[Opus 17]

Basically, unless you use "accrual based accounting" (which is complicated and needs an accountant to set up) then you are a cash basis business.  You report income when it is actually received, and expenses when they are actually paid, even if you are paid in advance for a job.  A check you receive in 2017 is 2017 income.  An expense you paid on 1/1/18 is a 2018 expense, even if your subcontractor or vendor did the work in 2017.

In your case, you will have more net taxable income in 2017 and less in 2018, but it should all even out in the end.

For the gift issue, I would defer to Critter#2 and maybe an accountant.

[Carl]

The thing with a gift, is that it's a gift "after" the giver of that gift pays taxes on it. Then if that gift is in excess of $15K in any one tax year, the giver (not the recipient) has to file IRS Form 709 Gift Tax Return. There are no additional taxes other than the taxes you already paid on the gift. But you do have to report it if it exceeds $15K in any one tax year. The giver also does not get to deduct their "gift" from their taxable income either.

[Opus 17]

If you take a simple situation where nothing of value is promised ("help Jane Doe with her cancer expenses") then all the money received by Jane Doe is a gift, and there are no taxes or reporting requirements for Jane.  The givers would be responsible for gift tax forms if any gift exceeded $15K, but that's not Jane's problem.  The beneficiary is providing no goods or services and is not in an ongoing trade or business.  Jane's only real concern is that if she leaves the money off her tax return, but gets a 1099-K, then the IRS may come looking for taxes any time in the next 3-6 years, so she needs to save excellent documentation of the campaign, and anything that was stated or promised as to what the source of the money was, to prove it was a gift.

-----

Here, the customer's problem is that some of the payments are clearly for a promised service with a reward, but other payments, while not accompanied by a tangible reward, are nevertheless in service of their business.  There is a web comic series I used to read, and the creator used crowdfunding every year to raise enough money that he could make the web comic his full time job and not have to work another job.  So they were basically collecting $100K or so per annual campaign.  Higher level donors could get signed artwork or other premiums, low level donors only get the pleasure of being able to read the comic every day for another year.  Money from the donors who got premiums is pretty clearly self-employment income.  What about money from donors who received no reward in return **other than the intangible reward of being able to view the web comic** for another year.  The creator is very clearly engaged in an ongoing trade, and money was received based on the promise that the creator would continue that trade for another year.  So I would say that the money is still self-employment income, as it is income received from an ongoing trade or business, even though the donors did not receive a tangible physical reward, only intangible benefits.

Maybe the IRS or journal of accountancy thinks differently, I am not an expert.

But I would argue that asking for donations so that you can be a content creator is income from a trade or business; even if you don't provide a premium, you are soliciting income to enable your content creation instead of having to work at Starbucks.  Which is unlike freewill donations to cancer patients and children of murder victims, which is more clearly solicitation of a gift.

Or imagine this rather silly hypothetical.  Suppose I like Taylor Swift as a person, and think she isn't nearly rich enough, but I don't actually care for her music.  I buy a $500 concert ticket and throw it in the trash, providing her with income but not consuming the product.  Would that be a non-taxable gift?

Hence, the need to see a professional accountant who will research the situation, issue an opinion, and back you up at your audit if the IRS disagrees.

[Opus 17]

Or another hypothetical:  What's the difference between creating a web portal called "Jack's channel" and charging a $10 annual subscription; versus opening a crowdfunding program for "Jack's channel" and promising 1 year of free content if 10,000 people each pledge $10.