Oh the tax implications of Kickstarter…
Yes I agree, Kickstarter is one of the coolest ways to fund your artistic project. It’s really awesome! I don’t mean to be a buzzkill on the blog here, but be aware that, as far as I can tell (and I’m no lawyer here, just a photographer who knows a thing or two about business with a Father-in-Law who is a tax attorney in New York City):
1) Money you receive from Kickstarter is probably “Income” and will be subject to your State and Federal (and City) taxes. It appears that, for the big projects ($20k or more) Amazon is going to start issuing 1099′s that will report the income to the IRS. That doesn’t mean that smaller projects don’t owe income tax too, just that you’d better keep track of it yourself because you’re not going to get a handy form. Of course, your expenses are deductible from your income, so you may not owe much income tax in the end. The point is, you’re running a business, so act like it, keep good books, and budget accordingly.
2) “Rewards” are probably subject to state sales tax. Yes, that’s right, “Rewards” are probably seen by the State Tax folks as things that people buy. And the last time I checked, “Tangible personal property” is subject to sales tax. (So, for example, if I sponsor a project for $25 and I receive a t-shirt as a reward, then the artist “Giving” (or selling) the reward probably needs to collect and remit sales tax on the reward. It doesn’t matter if the reward is of far lesser value than the gift – for instance if you give $100 and get a souvenir button in return. Technically, you just bought a $100 button and that’s subject to sales tax.
Kickstarter offers this advice on how to set “the price” for your reward, and it’s as close as it comes to an outright acknowledgement that “reward” is just a fancy name for “good offered for sale”: So what works? Offering something of value. Actual value considers more than just sticker price. If it’s a limited edition or a one-of-a-kind experience, there’s a lot of flexibility based on your audience. But if it’s a manufactured good, then it’s a good idea to stay reasonably close to its real-world cost.
Leslie Burns has a really really good post about the issue. And here’s a fun talking animation that addresses it as well. (I think it’s really good for the first 3 1/2 minutes, but then starts garbling up the income tax and sales tax issues. But you get the idea):
