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Sunday, July 13, 2014

The Tax Consequences of the Potato Salad Guy's Kickstarter Campaign

Kickstarter LogoTax Foundation: $21,000 Tax Bill Just for Some Potato Salad:

As of 2:30pm on July 9, 2014, Zack Danger Brown has amassed over $70,000 in pledges from donors using Kickstarter—a website that matches donors to projects—to make potato salad.

KS

Nearly 5,000 backers from across the world have chosen Brown’s potato salad project, and tens of thousands of dollars will be dished to Brown on August 2. But once these funds are given to Brown, they will constitute income that might mean a sizeable tax bill for Brown. Kickstarter explains how pledges are taxed:

In the U.S., funds raised on Kickstarter are considered income… A creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes.

Kickstarter also notes creators “may be able to classify certain funds” as nontaxable gifts instead of income, so long as the funds were pledged with “detached and disinterested generosity,” but one look at Brown’s Kickstarter page shows that these funds probably won’t qualify.

Brown offers donor specific handouts, such as a recipe book with potato salad recipes from every donor country for pledges of $50 (so far 83 backers), potato salad themed hats for pledges of $25 (234 backers), and even a potato salad themed haiku for pledges of $20 (4 backers).

So, given that Brown’s funds will likely be considered income instead of non-taxable gifts, how much will he have to pay in federal, state, and local income taxes? ... In total, Brown’s federal, state, and local tax burden on his income of $65,912 is $21,167.49 for an effective tax rate of 32.11 percent, leaving him with take home pay of $44,744.51 less taxes and expenses.

Update (7/11/2014): Kickstarter has updated the funding totals (currently around $48,000 at 2:25pm). According to The Business Journals, the boost in total funds resulted from some fake pledges which have now been removed. Stay tuned, and we will update the final numbers once the remaining 21 days have expired.

Other commentators have pushed back on the Tax Foundation's analysis, arguing that the payments would constitute non-traxable gifts.

(Hat Tip: Eli Bortman, Allison Christians, Leandra Lederman.)

http://taxprof.typepad.com/taxprof_blog/2014/07/the-tax-consequences-.html

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Comments

If Brown's business is incorporated, why can't the money gifts to Kickstarter be treated as a capital contribution from nonshareholders under IRC Section 118?

Posted by: Elmer Stoup | Jul 14, 2014 9:55:13 AM

Of course, my previous reference to Section 118 would only apply to contributions specifically given to Kickstarter in order for Brown, Inc. to acquire assets. If the contributions were intended to subsidize operating expenses, then the contributions could not be excluded from gross income under Section 118.

Posted by: Elmer Stoup | Jul 14, 2014 10:00:43 AM