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GoFundMe & Covid-19 Charity Tax Issues

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Level 3

GoFundMe & Covid-19 Charity Tax Issues

April 13, 2020

Raj1 (Pro Series Live Community)

A Tax Payer wants to help contribute to Covid 19 Charity through his GoFundMe funds and provided the following info:

 

He has established two GoFundMe accounts (it's a for-profit crowdfunding website) to help us raise funds to buy equipment to fight COVID.  He raised over >$20k in each account (= Total $40,000) but didn't anticipate the potential tax burden that it would create.  As I understand it, raising more than $20k means we would need to file a 1099-K and would therefore have to declare these funds come tax season 2021.  We should be tax exempt since the money truly is derived from charitable donations and there is no quid pro quo.

 

Establishing a non-profit is one solution but it would take too long and the necessity for the money is time-sensitive. 

 

The proposed solution he has devised is that he would accept the funds into a newly created personal checking account with the goal of depleting the funds and closing the account within several months.  I'd also keep a meticulous record of all the receipts and expenditures.  Obviously, I want to help but I want to ensure that I'm best protected as well.  How do I ensure that I'm not adversely affected in April 2021?

 

From my research, it seems that the funds sit in an account at GoFundMe and must be wired to a bank account (no credit cards allowed).  I have access to the money not because I created the account but instead, I was listed as the beneficiary.

 

Potential Solution and Research

 

Setting up a tax exempt (non-profit) org for this one-time spl project is not practical and feasible.

 

In a worst case we can report this on Sch C in his personal tax return and show amounts disbursed for charity in the on line 27a / 48 and report $0 profit or loss.  But this is not the best solution but may work.  

 

Form the tax literature available so far in this newly emerging grey tax reporting area, the other solution is "no reporting is necessary" since it is not for business. And if the IRS requests any details, we provide all the documents and receipts.  Also, if you are contributing to "Exempt" charities, the task to meet with the IRS compliance is easy.

 

Funds received by you are supposedly $15,000 or less (annual gift exemption limit) from "each" contributor, so they don't need to file a gift tax return. And you being the recipient, there is no tax return to be filed by you or gift tax to be paid by you.  And you have the right to use the gift amount the way you want it.  In fact, in that case, you may be even eligible to claim charity deduction on your own personal tax return for donation to qualified charities, which is not what you are looking for but is an unintended tax benefit. 

 

Some Useful Related Tax Info below FYI

 

A Note and Clarification on 1099-K

 

It is not you who would be preparing / filing /issuing 1099-K but the Credit Card Company will issue to you.   1099-K simply reports that you had 200 or more transactions netting a total of $20,000 or more through the electronic-payment processor that issued the form.  A 1099-K is not a determination that you earned income. 

If your crowdfunding income is not taxable, you do not need to pay tax on the amount reported on Form 1099-K. The IRS will likely request additional information about why the income wasn't taxable though, so be prepared to provide supporting documentation.

Usually, amount per 1099-K is reported as "Revenue" on Schedule C (for reporting "business" income which is not applicable in your case) and the business claims expenses and deductions to arrive at the final "Net" profit or loss.

 

The following info is provided to you just to give you some comfort that you may proceed with your noble task ASAP and we can deal with the tax reporting issues as things unfold as I do not see, prima facie, any personal tax liability issue for you.  And I am trying to get some more answers on the subject within a day or two.

 

Per Block Advisors (FYI)

Taxes and Crowdfunding

You may wonder “Are those billions of dollars of donations considered taxable by the IRS?” Here is greater detail about how you should claim crowdfunding monies on your taxes:

Tax law around crowdfunding is still grey area.  So far, the IRS has been silent on how taxpayers should address crowdfunding on tax returns. Without official guidance, the proper tax treatment likely hinges on two factors:

  • The campaign organizer’s intent and factual situation, and
  • Whether backers receive goods or services in exchange for their contributions.

Although the funds may come in through a single platform, tax implications can be surprising for taxpayers who think each donation is one in the same.

Business Ventures

One thing is pretty clear: If a campaign organizer’s intent is to generate funds in exchange for goods or services, and if viewed outside the context of the crowdfunding website was seen as such, the raised funds should be considered taxable business income, under Internal Revenue Code § 61(a).

IRS Reporting

Crowdfunding websites will often issue a Form 1099-K, Payment Card and Third-Party Network Transactions, to the campaign organizer receiving the funds. How taxpayers should report the amount on this form on their tax returns varies depending on the nature of the payment. Err on the side of caution: Since the IRS implemented the Form 1099-K, they have sent more notices to taxpayers who received the Form 1099-K, but did not report the income on their returns.

“Life Event” Fundraising

Life event crowdfunding websites like Indiegogo and YouCaring allow individuals to raise funds to cover the costs of various life events, such as a bucket-list trips or medical bills. These campaigns typically have no resemblance to business activities. Donors typically don’t receive anything in exchange for their contributions, thus the proceeds received are not considered taxable income. (Under  § 102(a), gross income does not include the value of property acquired by gift.)

If the donor didn’t receive anything in exchange for giving the money, the recipient can likely exclude the income from his or her taxable income because it was a gift. In other words, to be a gift, the donor must give “something for nothing.” These same rules apply when the contribution is between relatives or friends.

Charitable Deductions

No matter how charitable the intentions of crowdfunding campaigns may be, contributions for individuals or organizations that aren’t qualified charitable organizations, such as §501(c)(3) entities, will not qualify as deductible charitable contributions, regardless of the circumstances. Taxpayers can deduct charitable contributions only when they’re made to qualified charitable organizations that are not intended to benefit specific/named individuals.

The Gift Tax Limit

Lastly, a contribution to an individual’s crowdfunding campaign that is a gift and doesn’t qualify for a charitable deduction may be subject to gift tax rules if it’s more than $14,000 – the annual gift-tax exclusion limit per individual. If a backer gifts more than that amount to an individual in a given year, the backer may have to file a gift tax return.

 

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Level 12

You don't make the 1099-K. The Payment Settlement Entity does this. Example:

Everyone gave through PayPal, so PP will issue the 1099-K to your client. Or, some people gave through credit cards, so the various Card Providers are responsible. Neither you nor your client are Payment Settlement Entities. You are the End Recipient.

"I was listed as the beneficiary."

Then the GoFundMe is presumed to be "for the benefit" of You, an individual.

 

Nothing here has anything to do with a Sched C business. All of this is Personal. No business return provides for Charitable giving other than 1120, anyway. That's the wrong concept.

 

You also seem to be confusing Gift and GoFundMe.

 

And now I stopped reading, too.

 

I would recommend listing it as Other Income, then backing it out as other deduction showing, for instance, it went to the local Hospital or whatever it actually went to, and be ready to defend that was Covid related and for the public good.

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"Level Up" is a gaming function, not a real life function.

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Level 12

I only read about 2% of what you said, and I didn't even see a question from you, but unless the GoFundMe campaign is giving services or products to those who pay the money, the people giving the money are giving Gifts.

As such, it is non-taxable to the person receiving the money.  The person receiving the money can do whatever they want with it, including donating it to a charity.

The people giving the original Gifts can NOT get a tax deduction because they are not giving it to a charity.  But the receiver may be eligible for a charitable contribution if he gives it to a charity.

If a 1099-K comes, you can ignore it and respond to the IRS notice when it comes.  Or you can try and avoid a notice by reporting it and then 'backing it out'.

Highlighted
Level 12

You don't make the 1099-K. The Payment Settlement Entity does this. Example:

Everyone gave through PayPal, so PP will issue the 1099-K to your client. Or, some people gave through credit cards, so the various Card Providers are responsible. Neither you nor your client are Payment Settlement Entities. You are the End Recipient.

"I was listed as the beneficiary."

Then the GoFundMe is presumed to be "for the benefit" of You, an individual.

 

Nothing here has anything to do with a Sched C business. All of this is Personal. No business return provides for Charitable giving other than 1120, anyway. That's the wrong concept.

 

You also seem to be confusing Gift and GoFundMe.

 

And now I stopped reading, too.

 

I would recommend listing it as Other Income, then backing it out as other deduction showing, for instance, it went to the local Hospital or whatever it actually went to, and be ready to defend that was Covid related and for the public good.

*******************************
"Level Up" is a gaming function, not a real life function.

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Level 3

Thanks qbteachmt.  Nicely summarized answer.

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Level 12

And a big thank you to everyone trying to help in these times.

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"Level Up" is a gaming function, not a real life function.
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Level 3

Thanks TaxGuyBill.  Your answer is also right on target and sorry for my mess up with the post.  I also accept your answer and thank for the same.

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