Crowd-Funding Question?

T

talktotommyb

Hi, I'm an indie director trying to get a horror feature made. I have a crowd funding campaign up with indiegogo. You can see the link below:

http://www.indiegogo.com/projects/watch-me-die-the-most-hardcore-horror-movie-ever/x/2320861?c=home

Anyways, I was recently speaking with my legal adviser and he is a bit nervous about the up in the air tax status of funds raised through this method. He suggests that I set aside 40% of what I raise so I have something to give the government if the IRS decides to tax this money. My confusion is that, since I have set up an LLC for my project and any funds going toward the production will be in a bank account set up for the LLC, then wouldn't any taxation of this money simply come under the taxation of the LLC? I would assume it would be different if these funds were going into my private bank account. Please let me know if I'm missing something.
 
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Your legal advisor is in a better place to offer advice about your specific
project and your LLC than any of us here. I believe you ARE missing
something. Donations can be taxable in many cases. Right now, only
you and your legal advisor knows exactly how you have set up the
receiving of those donations. We can all speculate but you know to be
cautious when getting advice from total strangers on a message board.
 
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I suspect it would be considered income, and thus taxable. Most common single-owner LLC setups basically pass through profits to you and you'd be liable for them on your personal taxes.

However - that assumes you ultimately end up with any money to pass through to yourself as income, which I wouldn't think would be likely if you're crowdfunding a low-budget film. i.e. you hit your goal and end up with $20k, then you spend it all on the production, and your LLC takes all the costs as expenses against the income. If there's nothing left over, there's nothing left to take as profits, and thus nothing to tax.

So now that I think about it, your legal advisors advice may be exactly the opposite of what you want to do. If you set aside 40% then that's money left over to pass through to you - you'll now be liable for taxes on that amount. Spend it on the film and it's an expense, set it aside and it's profit.

Of course this could also be effected by timing - if you get the money, but don't spend it all before the fiscal year ends, then you would potentially end up with taxible income.

IANAL though so I'd get a second opinion - I'm not sure what your 'legal advisors' background is, but it just doesn't sound to me like they really understand the situation.
 
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ItDonnedOnMe said:
I'm not sure what your 'legal advisors' background is, but it just doesn't sound to me like they really understand the situation.
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No sh!t.
I don't think this adviser knows WTH he/she's blabbin' about.


If the proceeds goto you it's income = taxable.
If the proceeds goto the LLC then it's likely revenue = taxable after expenses deducted.

http://www.reuters.com/article/2012/08/13/us-column-feldman-crowdfunding-taxes-idUSBRE87C0F120120813
http://www.investmentnews.com/article/20130130/FREE/130139993
http://www.crowdfundingblogs.com/crowdfunding-and-taxes/
http://www.businesswire.com/news/home/20130408006568/en/Film-Crowdfunding-Risks-Opportunities

More of an overview of the crowdfunding process, but interesting:
http://www.womenarts.org/skills/crowdfunding/



If this flexible funding campaign raises more than pocket change get an attorney. :yes:
 
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My best guess would be depending on what he does with that money. If s/he put it in their own pocket instead of spending it on making the movie, then yeah sure it'd be income and highly likely taxable.

My suggestion would be to get advice from a tax accountant if it's really something that is pressing on your mind. Your lawyer may be right or may be wrong, though my point still sticks. I personally don't ask my mechanic for computer advice or my accountant for legal advice, why take tax advice from a lawyer?
 
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rayw said:
I don't think this adviser knows WTH he/she's blabbin' about.
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What good is a legal advisor who cannot give you accurate reliable advice?

Everything is going to depend upon how you set up your production company (LLC, or corporation, or umbrella subsidiary, etc.) and how that entity allocates and expends its funds. You need reliable legal counsel, a business manager and a tax accountant to set all this up legally so you are not left vulnerable.
 
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gorillaonabike said:
You're wrong.
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care to go into more detail? lol I'm quite interested in this I'm approaching the point of crowd funding myself.

I thought (no expert) that if the money went into a LLC and was then spent with no profits made you wouldn't be taxed?

Also, if you were a sold trader you could get tax back etc by keeping all your receipts?

Again, no expert and the best advice would be get an accountant to look over things
 
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At it's core crowd funding is, technically, selling shares in a for-profit venture; people are not donating money, they are investing capital in the hopes of a future profit. Again, technically, this comes under the purview of the governmental agency in charge of stock investment transactions; in the US that would be the SEC (Securities and Exchange Commission).

That is why monies received from crowd funding are not gifts.


Now, ALL of the monies received must be accounted for to the SEC (or whatever body governs such transactions in your country). If you fail to give a full and proper accounting it is possible that you could be charged with fraud. Again, if you want to get technical about it, you CANNOT buy equipment with the monies received if you crowd fund to shoot a film (unless, of course, you specified the allocation of funds in your crowd funding "prospectus"). If you want to buy equipment you should be crowd funding for your production company, not your production.


Yes, there are hundreds, if not thousands of gray areas and exceptions; that is why you need corporate counsel and expert tax advice. It would be a real shame to shoot a great, commercially successful film and spend whatever profits you get on keeping yourself out of prison for tax fraud.
 
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Alcove Audio said:
At it's core crowd funding is, technically, selling shares in a for-profit venture; people are not donating money, they are investing capital in the hopes of a future profit.
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This is incorrect. 'Crowdfunding' as commonly used with platforms like Kickstarter and Indiegogo is specifically not for investment; the funds that come through them are treated purely as donations and do not include any ownership or profit return to donors. For example, this is item #2 on Kickstarter's 'not allowed' list:

"Kickstarter cannot be used to sell equity or solicit loans."

Now there is legislation in motion to establish a space for crowdfunding-as-investment for small projects (I believe the cap is $1 million and there are limits on how much each investor can contribute as well as the total number of investors). That still a very new thing though and not at all common due to the significantly increased complexity (even with the simplified form enabled by the new legislation).
 
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Actually you're using Indiegogo.. therefore that money is NOT going into any bank account. That money is going into a Paypal and the laws regarding paypal taxation is that you meet two requirements

1) Over 200 transactions
2) Over 20k earned
Both have to be within a single calendar year.

Although having some experience with Kickstarter (card/board games) it is still smart to set aside a good percentage. Indiegogo... different story.
 
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I don't think crowd funding contributions count as donations, investments or gifts.

The idea of crowd funding is that you are selling a product. Your contributors purchase something from you, be it a credit in the film, a copy of the DVD, a poster, a t-shirt... They pay whatever you deem to be the value of that product. As an individual, those sales would probably be covered in the same way as an individual selling their own items on Ebay... I believe that is tax free.

If you are a business (or a production company), that's a different matter. But then, I don't think a business can set up a crowd funding campaign...
 
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mlesemann said:
I'm quite sure that that is NOT correct...
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As an Ebay seller (not a Marketplace Seller, those on Ebay that operate as a business), just an individual selling my own stuff, I know I have never paid taxes on my Ebay sales, nobody's ever requested any tax and I've never heard of anyone paying tax in such a situation. Businesses, yes. In the article you link to, they refer to when your hobby becomes a business. That probably is quite prevalent to KS and IGG.
 
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The fact that no one does it (pay tax on Ebay sales proceeds) doesn't mean that they don't, in principle, owe it. From their (Ebay's) explanation:

The IRS rules are clear: you must pay taxes on all personal and business income and that includes money you make selling on Ebay.
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Can you get away with not reporting small amounts? Sure. But that doesn't mean you don't, technically, owe tax on it.
 
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mad_hatter said:
As an individual, those sales would probably be covered in the same way as an individual selling their own items on Ebay... I believe that is tax free.
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Everyone's making this a lot more complicated than it is. There really aren't a lot of situations where income is tax-free. Even for small amounts you are supposed to report them and pay taxes, although many people don't because there's not much of a paper trail to show they exist.

It's real simple. The money you get from a crowdfunding campaign is income, and therefore is subject to taxation, regardless of amount or your status as a business or individual.

When you file your taxes you'll report your expenses as well (either on a 1065 for an LLC, or a schedule C for an individual) and only be liable for any profit after expenses. If you spend all the money you raised there will be no remaining profit and therefor no tax liability.

You can get away with having no profits for a business entity for a year or two, but if you're doing this much longer than that under a single entity you may increase your chances of an audit and the possibility that the IRS will deem your activities a hobby rather than a business (i.e. an ongoing business that never makes any profits isn't really a business). When that happens they may come after you for back taxes on previous years. This is one of the reasons it can be good to form a new business entity for each new project. Ultimately though this isn't much of a concern since most independent films strike it big and return millions in profits within the first year or so of release.

But again - this is just my knowledge based on over 15 years as a freelancer/small business owner. I don't know how things differ in the UK, so consider this US-specific. I would highly, highly recommend finding a good tax advisor (someone who specializes in small businesses & LLCs) to consult with - it won't cost you much to spend a couple hours going over what you're doing to make sure you are at least starting down the right road so you don't find out when it's too late.
 
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