A Guide to What Works and How

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I’m the Taxman, Yeah-eh, the Taxman

When you use crowdfunding to raise money, you might not at first consider all the fees that are deducted. This is, for sure, going to be several pages, and maybe a chapter, in the Crowdfunding book.

Many sites, such as Kickstarter, take 5% of the gross as their cut in running the site and making all the magic happen on the back-end. Credit-card processing takes an average of 3–5% at the sites I’ve surveyed, varying because some cards (like American Express and certain Visa and MasterCard branded cards) charge higher fees for acceptance.

You have to figure you have 10% in processing total off the top when planning.

That 90% that remains gets reported in the United States as 1099-MISC income, which is non-employee compensation. The crowdfunding site reports this income to the IRS, and sends you a form about the end of January.

I am not an accountant (IANAA, as it were), but this is where people may get tripped up.

For the simplest case, in which you’re a sole proprietor, you might owe city tax, state tax, and federal tax, not to mention state and local sales tax.

In Washington state, where I live, both the city of Seattle and the state collect a “business and occupation” (B&O) tax, which is assayed against gross receipts. Whatever shows up on 1099-MISC, I have to pay tax on (0.45% to the city and 2.5% to the state). There are no deductions one can make, although rather small businesses are exempt from paying (but have to file nonetheless).

At a federal level, you get taxed at the marginal rate for your income with the crowdfunding gross adding to whatever income you made for the year. This can push some people from one tax bracket to another, like 15% to 25% or 25% to 28%. You pay the highest tax on the last dollar you earn, as it were, not on every dollar.

(The U.S. uses brackets, which mean you only pay a given rate for the range of income for that bracket. For instance, for a single person or married-filing-separately, after deductions and other adjustments on a 1040 in 2012, the 15% rate applies to $8,700 to $35,350, and 25% rate applies to an adjusted gross income from $35,350 to $85,650. If your adjusted gross income was $30,000 before the crowdfunding project, and that added $10,000 without offsetting business expense for $40,000 total, you’d pay 15% on $5,350 of that and 25% on $4,650.)

The upshot: you have to be sure you can pay the tax on that additional amount added on to your income, at whatever bracket(s) it falls into.

Of course, and here’s where you need to see an accountant or tax preparer, nearly any crowdfunding project will have large associated expenses that will be deductible for a sole proprietor. For my project, I’ll have travel, professional services (graphic design and illustration), book production (printing), and so on.

But I’m trying to raise money in 2012 for a project that won’t complete until 2013. I’ll wind up paying tax on what I receive in 2012 for which I don’t have offset expenses (since the book won’t be printed until next year), and have expenses in 2013 that will offset some of the tax paid this year. (It gets more confusing when, like me, you have to pay quarterly estimated federal taxes, and have to be sure you pay the right amounts on time, too, figuring out what those should be.)

If you plan it right, you’ll make sure you have both your funding and your expenses in the same tax year.

Again, a good reason to talk to a professional.

Finally, the issue of state sales tax. Whatever state(s) in which you’re doing business take a keen interest in collecting sales tax on any purchases made by an end-user (whether consumer or business) and handed over or shipped within a state.

Where crowdfunding fits into that is going to be a bit tricky, no? Because if you have, as I do, a $125 pledge level that gets you a hardcover book, an ebook, acknowledgements in the book, and blog and video access over the next several months as I document the project, what part of that is taxable when I deliver a product in Washington state?

I expect that there is a taxable portion: some sort of fair-market value of the tangible deliverables, like the book, but not the goodwill. The pledge isn’t a sale; it’s closer to a gift with a product attached. I’ll talk to folks who have run large projects to see the advice they got, and will be talking to (and paying) professionals to get answers for the book as well. I’ll likely contact the tax offices in larger states to see if they have a policy that applies.

Given that estimates put worldwide pledges for micropatronage at nearly $3 billion in 2012, I can imagine states will be looking closely at the hundreds of millions of dollars exchanging hands in the United States, some portion of which involves same-state product delivery, and licking their chops.

Bottom line? It’s possible that between fees, local taxes, and estimated payments, you could have only 55% to 65% of the gross amount of funds raised to work with initially, and recover some of that through lower taxes on other income in the following tax year.

I’ll be writing more about this as I investigate the ins and outs.

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Planning the Video

I knew that for my book project, I would need a video for two reasons.

First, I plan to shoot video of interviews during my travels and research, and will post them to backers of the project (and when the book is out, to a broader audience). Since video is a component of what I’m doing, I needed to demonstrate some of that in the proposal.

Second, Kickstarter says that more projects with video fund than those without. It would foolish of me to not include a video as a result. (Although there’s always the issue of which is causation and which is correlation. Is it perhaps that those people pulled together enough to make a good video are also better organized and focused in other ways.)

I started months ago by asking folks associated with a few crowdfunding efforts if they’d talk in person or by Skype to include in the project. I wrote a script for myself, and after shooting video of other folks, edited it together into a rough narrative and inserted still images.

It took a long, long, long time for me to hone the message for my introduction to the video. With help from my friend Don, who is a documentary filmmaker of a more decades than he would want me to mention, I revised my “story” to better explain why people should trust me to accomplish this project and what I’d bring to the table.

I’m happy with the final results, although I was awfully tired of memorizing my script and reshooting it and making multiple takes by the end.

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Starting the Process

I’m exhausted and exhilarated this evening after having launched my Kickstarter project for this book earlier today. I’ve been thinking about writing a book on crowdfunding since last year, and starting putting the pieces together six months ago.

I’m a freelancer, so it took that long to spend the time to write up my proposal, solicit feedback from my friends and colleagues, and craft my text and make the video.

The video in particular was a bugbear. I used to shoot and edit video all the time decades ago, but haven’t done much recently. I had to learn many skills, and get advice from more knowledgeable sorts to put together something decent. I have learned a lot about what I don’t know and what I need to know that will help me as I videotape interviews for the book.

A few hours after launch, I’m approaching 2% of the $35,000 goal. I soft launched, mentioning it on Twitter, and emailing a few friends. My hard launch will come Monday, with an article at a major technology site that has always been very supportive of my work, and emails that I’ll send to dozens of people who have helped or asked to be told about the project when it launches.

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Learning My Own Lessons While Preparing the Project

Lest you think that I’m Mr. Slick, I am learning and re-learning my own lessons about launching a crowdfunding project while trying to launch my own.

I’ve known for months that I would need a video for the Kickstarter project. Kickstarter doesn’t make a perfect correlation, but a much larger percentage of projects with videos get funded than those without. (Kickstarter’s FAQ says 50% of projects with video fund versus 30% without; those that fund, bring in more money, too.)

I spoke months ago with various folks I’d interviewed before about recording a little video with them to include in my project. I did an in-person shoot on the windiest day ever in Washington, D.C., with Pleasant Pops. I spoke with the folks behind Glif (Dan and Tom) and with Ze Frank via Skype video. I started edited the video weeks ago to pull together pieces.

A personal appeal is part of the charm of crowdfunding, and every single person I’ve spoken to with a successful project, as well as Kickstarter staff, said, be direct, personal, and straightforward in the video.

I tried taping myself with an inexpensive but decent digital camera I own, but couldn’t get it to look just right. I recorded a few roughs, wrote some dialog for myself, recorded voice overs to intro the video interviews, and it wasn’t there.

My friend Jeff Carslon, who has written books on using Apple’s Final Cut Express and iMovie, has a digital SLR camera that records video, and a bit of a studio setup. I went over to his house; we set up the shot; it looked more or less good. But what I was saying still wasn’t right, and we didn’t manage to record the audio (through a separate mic) to sync up perfectly with the video. The audio from the camera was too cavernous.

So I’m reshooting again, and re-recording the voiceovers to make them all consistent. It’s just a minute or so of video and a few seconds of voiceovers, but I need to get it right. If I don’t sweat the details here, then how can I get backers of my project to believe that I will sweat the details in the book?

It’s clear that you don’t need an expensively produced video for a crowdfunding project. But you need a perfectly competent one. For my purposes, if I can’t be competent, then my project shouldn’t be funded.

So it’s back to record again, re-edit, and make it fly. This delays launching the project a bit, but that’s a small price to pay in order to get the fine points right.