The Worst Time to Start a Crowdfunding Campaign

Learn from entrepreneurs who ran crowdfunding campaigns at the wrong time!

Highly funded Indiegogo campaigns
Some crowdfunded food and beverage companies have raised a lot more money than expected. Indiegogo

Note: This article is for information only and should not be considered tax advice or other advice. Please seek advice from a professional related to your own financial situation.

This may be the most important tip for successful crowdfunding. 

I, too, learned the hard way.

So you've run a successful crowdfunding campaign with Kickstarter, Indiegogo or any other platform. You've met your campaign goal, just enough money to produce the rewards and whatever it is you raised the money for.

Or did you?

The Tip: Time Your Campaign to END In the Same Year as Your Expenses

Liz Downey and her sister ran a Kickstarter campaign for Foodie Dice, and raised $156,000 in October, 2013. "Even though we spent some of our funds on inventory in 2013, we had a large tax bill because many of our other expenses weren't incurred until the first few months of 2014," Liz says.

Same here. I ran a Kickstarter campaign for a kids book called the Chocolate Chip Cookie School. The campaign ended in mid-2014. But the timeframe in which I hired several illustrators, designers and editors spilled into 2015. It didn't occur to me to have them pre-bill for their services the year before!

The rule that I was very familiar with that it's best to incur expenses in the same year as expenses, for small business tax deductions, somehow did not click as I managed the crowdfunding campaign. I knew that ultimately the book production expenses would probably exceed the amount I had raised.

It just didn't occur to me that the Kickstarter revenue would count toward my overall personal income — and that even though ALL the proceeds would be used up with expenses, that needed to happen in the same year.

The New York Times tells even more stories about crowdfunders whose tax expenses surprised them.

Hard Lesson Learned on Inventory Tax

The Foodie Dice entrepreneurs took the money their raised on Kickstarter and invested in inventory to get better pricing. Then came the shocker. "We had to pay the taxes on everything that we had in inventory that we hadn't yet sold," Liz says. "So it felt like a lot compared to the cash we had left."

They had thought the inventory was an expense and therefore a deduction, but learned it's not until you sell it. "It basically brought us down to zero and we hadn't even paid ourselves anything for all the work that went into those months," she says. Yet, they discovered there wasn't much they could have done differently.

Lesson learned:  Liz says: "We could have saved a bit by filing taxes as an S-corp (which we do now, even though we are still an LLC. It's Form 2553). Until you reach a certain amount of profit (probably somewhere around $75,000-100,000) the extra hassle is not worth the savings."

Take Away 3 Tips for Maximizing Crowdfunding Proceeds

  1. Plan ahead and account for tax and other non-project expenses in what you need to raise and your reward pricing. "We took it into consideration when we priced our rewards, but had additional costs come up that ate into our margin," Liz says.
  1. Find and hire an accountant who is well versed in crowdfunding situations before running the campaign.
  2. Run the campaign in the same year you will incur expenses. This is SO important.

The Foodie Dice team decided not to form as a C corp, which some entrepreneurs do to avoid a personal income tax hit. "As an S-corp our income is still pass through, but we only pay self-employment tax on the part that we pay ourselves as salary now." Liz says.

A Tax Expert's Viewpoint

Crystal Stranger, EA, President of 1st Tax and author of The Small Business Tax Guide shares more  thoughts on making the most of crowdfunding proceeds:

If you are the default entity structure of a calendar year business operating on a cash basis it can be a big problem to receive any sort of pre-payment prior to the end of the year.

There are many other ways to structure a business though, including setting up a fiscal year and operating on an accrual basis where income and expenses are reported when used rather than when paid/received.

If you do receive a large chunk of funds that are pre-payments for services near the end of the year, it is recommended to purchase as many materials and capital items as practical before year end, so as to minimize the tax hit.

Got More Food Crowdfunding Tax Tips or Horror Stories?

Liz of Foodie Dice sums up their experience: "The only thing we might have done differently is run the campaign a little sooner in the year and perhaps to invest in other things that year instead of waiting until 2014 so that we were spending the money on things we needed instead of taxes. If we had run the campaign in August for example, we would have had 2 more months to accumulate legitimate deductions for the year."

Got your own story or tips? Please get in touch if you'd like to share!