March 1, 2018
Taxes, and Fines, and Felonies… Oh My!
The Unintended Consequences of Crowd Funding.
By M. Brandon Robinson, Esq.1
Crowd Funding, which became popular in the early 2000’s, is the practice of raising funds to support a project, venture, or individual by gathering small amounts of money from a large number of people. From buying equipment for the local pee-wee football team, supporting an individual through a difficult personal time such as a sudden and profound illness, to providing financial relief after a disaster, Crowd Funding has become the “Donation Jar” of our time. Crowd Funding websites have become so popular and numerous that they now specialize in raising money for particular types of causes. Want to start a new company or launch a new product? Indie Go Go can help you out. Need funds to make your directorial debut with that movie you wrote in college? Kickstarter is your new best friend. Need help paying for your dog’s veterinarian bill because he was hit by a car? Go Fund Me is the platform for you. While becoming ever more popular, there are some hidden, often unintended consequences of using a Crowd Funding Website. Such unintended consequences can result in unexpected tax burdens, monetary fines and penalties, and in select situations, felony charges against the fundraising organizer. Generally, these unintended consequences fall into the following categories: Funding; Taxes; Insurance; Public Benefits; and Legal.
Once upon a time, caring individuals would place a donation jar on the counter of the corner convenience store to raise money for a local person in need who had been struck down with a sudden disease or illness. People putting a dollar in the jar could be fairly certain that the entire amount raised would be received by the person in need. That is not at all the case with Crowd Funding Websites.
First, many of the Crowd Funding Websites charge a percentage fee simply for hosting the fundraising campaign. The industry average for a “platform charge” is approximately 5%. In addition to the platform charge, the payment processor will charge an additional fee to process the donation. Go Fund Me’s payment processor, WePay, charges 2.9 % and $0.30 each transaction. Therefore, if someone made a donation of $100.00 to a good cause, $5 would go to the platform, $3.20 will go to the payment processor, and the cause will only receive $91.80. The cause is losing out on approximately 8% of the funding simply by using a Crowd Funding Website instead of accepting the donations directly.
Second, many Crowd Funding Websites require the fundraising organizer to set a “goal” for funds to be raised. If this goal is not met, the donations are not received and the organizer receives nothing. This can cause most fundraising organizers to lose many hours of sleep at night as they wrestle with what amount to set the “goal” at. Set it too high, and the organizer may receive nothing. Set it too low, and the funds received may not be enough to truly get the project off the ground.
Lastly, a fair number of Crowd Funding websites do not verify the use for which the donations are to be applied. Any scam artist can post a fundraising campaign claiming that they need money for a wide range of problems that will stir the sympathies of most people, from a major illness to a natural disaster. The majority of people making donations never verify that the person is real, that the problem is legitimate, or that the funds will go to address that problem, thereby allowing scam artists to line their pockets based on the donator’s charity and goodwill. Anyone who organizes a fundraising campaign should include links to materials that verify the campaign issue, and people who like to make donations should always verify that the fundraising campaign is legitimate before entering their payment information.
The use of Crowd Funding websites can have unintended tax consequences both for the fundraising organizer and the person making the donation. The fundraising organizer may be hit with an unexpected tax bill depending on the amount of money raised, the number of donations made, and the purpose for which the funds were raised. All of the payment processors for Crowd Funding Websites are required by law to report to the Internal Revenue Service any fundraising campaign that raises more than $20,000 or that has more than 200 transactions. If the fundraising organizer’s campaign hits either of these benchmarks, the organizer can expect to receive an IRS Form 1099 come tax time.
Whether or not the fundraising organizer will need to claim the funds as a gift, ordinary income, or business income will depend on the purpose for which the funds were raised. If the fundraising organizer is raising funds to support an art project, they will most likely have to claim all funds received as ordinary income. If a company is raising funds to launch a new product, they will most likely have to claim any funds received as business income. Likewise, if the fundraising organizer is raising funds for a charity or an individual, the funds received can likely be claimed as a gift but will require some additional paperwork on the part of the fundraising organizer.
When attempting to claim the funds donated as a gift, the fundraising organizer will still receive an IRS Form 1099 and will have to show the income on their tax return. The organizer will then need to use a 1040 long form, listing the fundraising “income” as “other income,” and then reflecting a negative adjustment using itemized deductions for the amount spent on approved items, such as medical bills. Additionally, the organizer will need to include a “Statement Concerning” the position taken, which is essentially a letter to the I.R.S. wherein the fundraising organizer would state that the funds raised were for a particular charitable purpose, that all funds raised were gifts from the donors, and that all funds were spent for the identified charitable purpose. Lastly, any fundraising organizer, or the ultimate recipient of Crowd Funding Website Funds, should keep all receipts of expenditures from the funds raised in case there is an Audit by the I.R.S., or in case they need to show that the funds were indeed spent on approved tax-deductible items.
Additionally, there are certain scenarios where the fundraising organizer may be hit with a tax bill for funds they did not even receive. All Crowd Funding Websites require that each fundraising campaign be listed under an individual’s social security number or a business’s employer identification number. Oftentimes family members, friends, and co-workers of an individual-in-need will start a fundraising campaign on the individual’s behalf, but will have the fundraising campaign listed under the fundraising organizer’s social security number. When this happens, and it often does, the fundraising organizer will be the person who receives the 1099, and will be the person responsible for paying any potential income tax liabilities due as a result of the fundraising campaign. In this scenario, it is highly likely that the fundraising organizer will be responsible for an income tax bill on funds actually received by a third party. To prevent this from happening, it is imperative that all fundraising campaigns on Crowd Funding Websites be listed under the social security number of the individual who will actually receive the benefit of the funds raised.
Unless donations made by an individual to a single person exceed $15,000, the current gift tax exclusion amount in 2018, the person making the donation to a Crowd Funding site will not incur any tax penalties, but they will not receive any tax benefits either. Generally, donations made to registered 501(c)3 charitable organizations are tax-deductible. However, just like money placed into the old-timey collection jar, funds donated to individuals or businesses through Crowd Funding Websites are considered non-tax deductible gifts. If an individual is interested in making a donation for disaster relief, they will receive more of a tax benefit by making a donation to the Salvation Army, Team Rubicon, Americares, or one of the other numerous 501(c)3 charitable organizations focused on disaster relief than they would by making a donation to a Crowd Funding Website. Additionally, as mentioned above, making a donation to a registered non-profit organization will ensure that the funds are used for the purpose for which they were donated.
Many of the fundraising campaigns on Crowd Funding Websites are started to assist an individual-in-need with medical bills stemming from an unexpected accident or illness. While the goals of these campaigns are admirable, they may actually be of little to no benefit to the individual-in-need due to what is known as an “Adjustment Clause” in many health insurance policies. These Adjustment Clauses state in pertinent part that the insurance company will pay less if it is determined that a third party is responsible for any portion of the medical bills. This clause is understandable if viewed from the perspective of a standard car accident, where the car insurance may be responsible for a portion of the medical bill. However, in the context of Crowd Funding Websites, if the insurance company finds out that there is a fund dedicated to paying the medical bills of the insured, then the insurance company will subtract the amount of that fund from the amount that they will pay the healthcare provider. This basically makes all of the donations made to the individual-in-need useless, as those funds will go to pay medical bills that would have otherwise been covered by insurance, in addition to requiring the individual-in-need to deal with the income tax implications discussed above.
Receipt of Crowd Funding donations may make the individual-in-need ineligible for need-based public benefits programs such as Medicaid, Supplemental Security Income (SSI), and Food Stamps; or will reduce the amount of assistance the individual receives from these programs. Because any funds raised will likely be reportable as income under the individual-in-need’s social security number, this additional income will likely put that individual over the income limit to qualify for the majority of need-based programs. Any individual-in-need should make a careful calculation of the effect a Crowd Funding Campaign may have on their eligibility for public assistance, and should only pursue Crowd Funding if it is in their best interest.
The State of Florida has very specific legal requirements for people engaged in fundraising, which can be located in Florida Statutes Chapter 496, Solicitation of Funds. For purposes of this article, I will focus on two specific sections of the law dealing with fundraising in response to a disaster, and fundraising on behalf of an individual, two of the most common Crowd Funding Website campaigns.
Florida Statute 496.4072 states that unless a charitable organization has been registered in the State of Florida for four or more consecutive years prior to making the solicitation, that any solicitation in response to a disaster that raises $50,000 or more must file quarterly disaster relief financial statements with the Florida Department of Agriculture and Consumer Services. Any person who knowingly violates this section is guilty of a felony of the third degree, and is subject to civil penalties as well.
Florida Statue 496.413 deals with fundraising on behalf of a named individual, and is reproduced below:
496.413 Contributions solicited for or accepted on behalf of a named individual.-
(1) Contributions solicited for, or accepted by or on behalf of, a named individual must be deposited in a trust account opened by a trustee named in a properly established trust document or must be deposited in a depository established in accordance with s. 69.031. The circuit court has jurisdiction over the contributed funds placed in such depository accounts.
(2) Disbursements of contributions may be properly made from a trust account only upon written verification from the trustee that the disbursement is in furtherance of the purpose for which the funds were solicited, with documentation reflecting the identity of the proposed payee and the justification for the proposed payment. Disbursements of contributed funds from a depository account may be made only as allowed by the court. When a trust account is to be closed and a balance remains in that account in excess of the amount needed for the benefit of the named individual, such excess funds may be transferred to another trust account for the benefit of another named individual who is in the same or similar circumstances.
(3) Any person or organization that violates the provisions of subsection (1) or subsection (2) is guilty of a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.
While the goals of Crowd Funding Websites are often admirable, their use may lead to many unintended consequences for both the fundraising organizer, who is only trying to help, as well as the individual-in-need, who likely has enough to worry about. However, by carefully considering the pros and cons of Crowd Funding Websites, knowing what you are getting into before starting a campaign, and preparing for the potential consequences, Crowd Funding Websites can be a great resource. It is our hope that this article will allow you to begin your Fundraising Campaign with the knowledge base necessary to avoid the most dangerous pitfalls of online fundraising.
*NOTE: Many of the tax issues in this article, including charitable deductions, income tax implications, and gift tax implications, may be affected by the passage of the Tax Cuts and Jobs Act in December, 2017. The effect of the Tax Cuts and Jobs Act on Crowd Funding Websites has not been analyzed for purposes of this article.
This article has been produced for general informational purposes only as a courtesy of Barnes Walker, Goethe, Perron, & Shea, PLLC, with offices located in Bradenton, Sarasota, Holmes Beach, and Parrish, Florida. Nothing in this article is intended to constitute legal advice or an agreement to provide legal representation. It is important that you meet with a licensed Attorney to have your legal issue properly analyzed.
Copyright © 2018 Barnes Walker, Goethe, Perron & Shea, PLLC
1 M. Brandon Robinson, Esq., an Associate Attorney with Barnes Walker, Goethe, Perron, & Shea, PLLC, is a V.A. Accredited Attorney, a member of the Florida Bar, and is licensed to practice before the United States District Court for the Middle District of Florida. Mr. Robinson is combat veteran of the United States Marine Corps who served honorably as an Ammunition Specialist Technician during Operation Iraqi Freedom. Mr. Robinson’s legal practice is focused in the areas of wills, trusts, estate planning, probate, guardianship, and Veteran’s benefits.