Understanding the Tax Implications of a Kickstarter Campaign
This is generic tax advice on how you would report income from a Kickstarter campaign for a personal non-tax deductible campaign. While the advice was written by someone knowledgeable of taxes, this advice may not apply to every individual’s situation. Advice from a tax professional is suggested if you are unsure of your tax liabilities.
So, let’s get right into it how you would report the income that you receive from Kickstarter on your taxes. The first thing I looked up was the reporting that Kickstarter provides to you/the government. Typically, payments to an individual under $600 are not required to be reported to the federal government. However, you are required to report any income on your taxes and to the IRS. According to Kickstarter’s website, they don’t seem to generate a 1099 form for you unless you hit $20,000 in transactions.
Since the Kickstarter website does not appear to answer the question of what tax forms they send to you for amounts under $20,000, it makes this analysis a little bit more difficult. Since there is not a specific form on which this income would be reported – I think you get two options. One would be to record the income on schedule C (business income) and the other choice would be to include the income within the other income line on your tax return. This would basically delineate whether you deemed this activity as a side-project/hobby or as a business venture. Here is a link to the IRS information about hobbies versus businesses.
With the assumption that you have a real job and are not relying on the Kickstarter income as income to live on, it would be my guess that this activity would be classified as a hobby rather than as a business. There are a few caveats to this – if you will be giving prizes at certain levels (i.e. t-shirts,) where the income from the business is clear and actually functions like a business, this might be the way to go. However, if you are planning your Kickstarter campaign to support your band, the purchase of cameras, instruments or rental of performance spaces doesn’t really strike me as deductible business expenses. Again, you should definitely work with a qualified professional who reviews your individual circumstances, but that’d be my instinct.
If you do go the business route, the income/expense thing is easier to figure out. I have linked to the schedule C-EZ here because that would probably be where you would go. If you use the actual Schedule C, you can use accrual accounting which is mentioned in this article, but I wonder if the actual hassle of figuring it out would be worth filling out the full Schedule C. If you are going the Schedule C route, I recommend getting a qualified tax advisor rather than using TurboTax or the ilk to figure out your Kickstarter tax liability.
If you are going the hobby route, then this income has pretty much no way to be deducted right back out. This is because the hobby deductions are included on Schedule A. Schedule A is your itemized deductions in lieu of your standard deduction. Unless you already use Schedule A due to medical expenses or large deductible interest payments on a home, your hobby expenses probably won’t get to deductibility here either. Even if you can deduct some hobby expenses, it has to be above 2% of your total AGI (including your normal day-to-day job income + your other income + this Kickstarter income,) so this probably won’t be as valuable to your tax savings.
It’s a matter of geography on your tax form 1040 at the end of the year.
The net sum of the advice above suggests to me that your music production activities aren’t really a business. The only thing that I’m recommending you call a business at that point is the income that you’ve received minus direct costs to fulfilling any promises you make on the Kickstarter campaign.
If you have your 2012 tax form, pull it out (or link here: IRS 1040 Tax Form) which I think would help you in visualizing where this activity would be put on the tax form.
Line 12 is where your business income and expenses would be put on the 1040. This matters though because if you can deduct the costs of your film production activities directly from your income, it’ll lower your overall tax burden. And the reason the government has set it up this way is because you want people to be able to limit their business income from legitimate business expenses but don’t want people to be able to write off their day-to-day hobbies (i.e. just because I collect beanie babies doesn’t give me the right to write the amount off my taxes) – kind of makes sense right?
However, the other way to see this – is that you actually made money off your hobby this year. And if I’m selling my beanie babies from the previous example, I can write off my income to the extent of my gain for the year.
http://www.ehow.com/how_5926102_deduct-hobby-expenses-federal-taxes.html
Hobby income goes on line 21 and expenses go to line 40.
Example:
Your income side: for the $7,500 side – there is no difference to you if it goes on line 12 or 21.
But – assuming you spend $5,500 of the $7,500 with $1,000 going to prizes and $4,500 going to the music production.
In a purely “all business world” the $5,500 you spend on t-shirts and on performance-related stuff goes directly against your income in line 12, which lowers your overall income.
Where as if your $5,500 is all hobby expenses, this goes into line 40 – the standard/itemized deduction. Because the expenses are hitting your schedule A as opposed to your schedule C, you lose a lot of the benefit of what you are spending money on. When you fill out your taxes, you can choose between an itemized deduction OR a standard deduction of nearly $6,000 off of your income before you calculate your tax expense. These hobby expenses would be in lieu of the automatic $6,000 standard deduction- you only get one *or* the other.
And chances are you won’t spend enough (because it’s not a dollar for dollar comparison, it’s only for those amounts spent above 2% of your total income – I’m pretty sure hobby expenses go onto line 23 of schedule A, if you felt like looking it up) to make taking the itemized deduction worthwhile. So that means, that all you did was increase your income on line 21 but didn’t get to write down any expenses against that new income. Which admittedly totally sucks but is the case that I’d foresee happening.
So, again – the geography of the $7,500 income doesn’t matter from a tax perspective – line 12 (business) or 21 (hobby). What matters is the deductibility of the expenses related to your activity, the business stuff would also go on line 12 and the hobby stuff would go to line 40. The difference in the geography matters because line 40 isn’t super favorable to you, as discussed above.
And then anything that you’ve earned minus deductible expenses is then taxed.
So…
ALL Business: Income/expense is in line 12 only (7,500 – 5,500 = 2,000 is taxed) – I’m not sure if this is defensible from a tax perspective but could probably be argued/maybe a little bit aggressive.
PARTIAL Business: All income, $7,500 goes to line 12 and your $1,000 in prize expenses also hits line 12 and your $4,500 in production related stuff vanishing – i.e. you are saying that the $7,500 is totally related to a business and that business was selling t-shirts/pens. It’d look like (7,500 – 1,000 = 6,500 is taxed.) This would probably be my position if this was my taxes but might still arguably be aggressive? I think that you would win this argument though – based on logic in my head, I don’t have any case law to cite- and its certainly not as beneficial as scenario 1.
or ALL HOBBY: Lines 21 and lines 40 (7,500 – 0 assumed deductible, though you can do this calculation yourself = 7,500 is taxed.) I’m positive this would be allowed because you are not getting any benefit at all other than the income but certainly won’t be as beneficial as scenario 1 or 2 based on what I’m assuming your situation is.
Again, I’m sure that there are more complicated and sophisticated structures and tax advice that you can follow – however, it seems to me that you would likely report the income on a cash basis on Schedule C and subtract out the cost of whatever prizes/administrative work to mail and use of a car for that piece. Outside of that, you will likely pay your normal income tax rate on the remaining income with a tax rate of your marginal rate (typically under 30%) for federal taxes and another 0-7% for state/city taxes. These percentages will vary by your income and tax jurisdiction but should give you a generic representation of what the tax implications of your Kickstarter campaign would be.
Best of luck with your Kickstarter campaign and I hope you better understand the tax implications of such a campaign.
