Crowdsourcing and Taxes

Practical and Practice issues for Professionals who practice in the area of taxation. Moral, social and economic issues relating to taxes, including international issues, the U.S. Internal Revenue Code, state tax issues, etc. Not for "tax protestor" issues, which should be posted in the "tax protestor" forum above. The advice or opinion given herein should not be relied on for any purpose whatsoever. Also examines cookie-cutter deals that have no economic substance but exist only to generate losses, as marketed by everybody from solo practitioner tax lawyers to the major accounting firms.
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Re: Crowdsourcing and Taxes

Post by Burzmali » Fri Aug 31, 2012 4:49 pm

Famspear wrote:Unfortunately, real world experience, for most people, does not provide the range of knowledge needed to succeed in business -- that's why most people fail in business. Some things in business are just too complex to handle without either having formal training or retaining a professional who has formal training.

From what I've seen, that tends to be the most important lesson unexpected successful (and normally successful) projects are learning. ;)

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Re: Crowdsourcing and Taxes

Post by BBFlatt » Fri Aug 31, 2012 6:03 pm

Actually, it doesn't really matter if he's using the cash or accrual method of accounting. Under the accrual method for tax purposes, income is reportable when received or when earned, whichever is earlier (see IRC section 451) and expenses, such as cost of sales are not deductible until both the all events test and the economic performance test have been met (see IRC section 461). In my limited experience with kickstarter projects, there seems to be considerable lag between the time the project gets funded, and product starts being produced. If the revenue portion of the transaction happens in a taxable year before the expense portion, then cases like the ones Burzmali describes are going to arise.

There's not much a CPA or tax attorney can do about that after the fact, but good planning beforehand might mitigate the situation somewhat.
When the last law was down and the devil turned 'round on you where would you hide, the laws all being flat? ...Yes, I'd give the devil the benefit of the law, for my own safety's sake. -- Robert Bolt; A Man for all Seasons

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Re: Crowdsourcing and Taxes

Post by Pantherphil » Fri Aug 31, 2012 6:40 pm

"Crowdfunding" has indeed caused a controversy under federal and state securities laws.

The so-called JOBS Act signed by President Obama called for the SEC to come up with new procedures to facilitate such arrangements as an innovative mechanism for start up businesses to raise capital. Here's an overview that I received.

New Crowdfunding Exemption

 The JOBS Act creates a new exemption, Section 4(6) of the Securities Act of 1933 (the “Securities Act”), whereby securities may be sold in small amounts to large numbers of investors through a method known as “crowdfunding.”
 Under the new law, the total amount of securities that may be sold to all investors by an issuer, including any amount sold in reliance on the new Section 4(6) exemption during the previous 12-month period, is $1 million.
 If an investor has a net worth or annual income of less than $100,000, then the amount sold to such investor in any 12-month period is limited to the greater of $2,000 or 5 percent of such investor’s net worth or annual income.
 If an investor has a net worth or annual income equal to or greater than $100,000, then the amount sold to such investor in any 12-month period may not exceed 10 percent of the net worth or annual income of such investor, subject to an investment cap of $100,000.
 To qualify for an exemption from registration under new Section 4(6) of the Securities Act, the securities must be sold through a broker or funding portal that complies with the requirements of newly created Section 4A(a) of the Securities Act.
 The terms of a Section 4(6) offering may not be advertised except by directing investors to the appropriate broker or funding portal through which the securities are sold.

[Note: This provision is intended to allow solicitation of small investments from many investors who are not accredited investors. There is great concern on the part of the SEC and consumer regulators that this will be conducive to fraud based on the vast amount of fraudulent “penny stock” activity and unregulated “crowd funding” which is already being conducted through the Internet. Regulations are scheduled to be issued by December 2012 but all indications are that the SEC will not meet that deadline. The SEC appears to be inclined to proceed with caution.]

Seems like a total bad idea to me. The possibilities for fraud appear endless. And no one is likely to want to deal with the bureacuracy that the SEC is directed to create.