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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mad_hatter said:
Ok, so here is a link to the HMRC website...

http://www.hmrc.gov.uk/guidance/selling/index.htm

It's talking about Ebay, but it might be of some interest. Basically, it's saying that someone like me, selling the odd item here and there, is NOT operating wihin the realms of income tax. However, reading through it, I'd be inclined to say crowd funding may well be a taxable income source.

It's a very grey area....
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well here is the email to Indiegogo, if anyone can be bothered and nice enough to find out what the tax situation is on this then let us know : support@indiegogo.com

perhaps asking them the situation for usa and uk would be a good idea.
 
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ItDonnedOnMe said:
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.
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How can they back tax you if you never made a profit?
 
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The reason you didn't make a profit is that you spent all the business income on the business, and therefore had no remaining profit to be taxed.

But that only works for businesses. So a film production company can buy a TV, deduct it as a business expense, and not owe taxes on that amount of income. If an individual buys the same TV they can't deduct it against their income at all.

So you buy the TV, deduct it from your business income, and then several years later the IRS decides that because your company hasn't made a profit in it's first few years (I think it's 3 out of 5 years that's considered legit) it was a hobby rather than a business. Suddenly that TV is no longer a legitimate business expense, and the amount you deducted becomes personal income that you are liable for taxes on.
 
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Maxsdad said:
For future reference, UK crowd funding is typically taxable (or regulated) under Seed Enterprise Investment Scheme (SEIS) or The Enterprise Investment Scheme (EIS), which are modified versions of their Capital Gains taxes. Gift taxes in the UK are slightly more complicated (that's an understatement) and not applicable to crowd funding.

http://lgn1353274846.site-fusion.co.uk/crowd-funding
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Hi Maxsdad, if the article is based off info from crowdcube? then it could be worth noting that where something like kickstarter offers rewards for donations, crowdcube is based more around people buying B shares in businesses so they are different.

As others have pointed out I think the best course of action anyone can take would be to seek advance for an accountant who specialises in tax. my 2p would be set up your film as a LLC, get crowdfunding funds to go into that account, if you've done your homework then all funds will be used on movie expenses so there's no profit left from the funds and therefore no tax. Keep all receipts & contracts incase the tax man comes knocking and you should be fine...I guess.
 
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Well there are two ways to look at this, either it is, as I would argue, a gift from
the donors, and therefore only taxable TO THEM if it exceeds $11k in a single year, or it is a "pre-sale" as the IRS is likely to argue and here is the thing, if EVERY PENNY is spent creating the onscreen product as it probably should be in the case of a crowdfunding scenario BEFORE THE SEC lays down it's rules to allow investors via crowdfunding, then all of that money will be spent in a tax deductible way and only withholding needed is the money leftover AFTER completing production and fulfilling the inducements to "donate."

Yes it will generally be reportable on the account holder's return, i.e. the LLC's, but as most LLC's don't elect to be taxed as a corporation and as they are generally pass through entities, i.e. reportable on the owner's Schedule C or K as the case may be, it would generally be an issue for the owner of a pass through entity.

Of course this is a gray area so opinions vary. The advice you have gotten sounds pretty damn good to me and while I don't play an attorney on TV I have been licensed in NY, and this post is meant purely for educational purposes and for the fun of the discussion and is in no way meant to be legal advice or create any kind of relationship.

Of course the request for a "No Action Letter" from the IRS is always a route you could take to get a definitive answer BEFORE FILING THE TAX PAPERWORK.
 
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