united-states tax-law currency
Tax law and holding accounts (like Kickstarter)
<p>Kickstarter is a simple example to highlight the question.</p>

<p>Let's say I'm Kickstarter's malformed cousin Rickstarter and someone is raising 100k for a project between November and April on my site. Rickstarter charges and holds funds in an account to distribute if the backer hits the 100k threshold, they fully refund in the case of the not hitting the milestone. </p>

<p>Let's say by New Years the fund has 50k in it's account. </p>

<p>Questions:</p>

<ol>
<li>How would taxes be resolved if the funds are distributed for a successful campaign (say 5% cut for Rickstarter if we need specific metrics) before they file in April?</li>
<li>How would taxes be resolved if the funds are refunded for a failed campaign before they file in April?</li>
<li>How would taxes be resolved if they filed in February before it became clear either way what was happening with the funds?</li>
</ol>

<p>By my understanding taxes are based on the prior year so I'm quite confused who exactly owns (and owes) what here.</p>

<p>Note: I do not know the internal mechanics of Kickstarter (some comment states that it does not work as explained), so I will work on Rickstarter description by the OP.</p>

<p>The funds are managed and held by Rickstarter but they are not owned by Rickstarter; it works as a scrow service.</p>

<p>For each $1 of cash directed to funding a project Rickstarter accrues an obligation (either towards the donor or the project to be funded)<sup>1</sup> of exactly $1; in the books there is neither profit nor loss. At some point of time RS will get its cut from that $1.</p>

<p>It is similar to getting a $100.000 loan from a bank: you are not any richer because with the money comes the obligation to pay it back.</p>

<p>A point of interest is <em>when Rickstarter gets its profits</em>. The basic rule is that Rickstarter can only put into the books its income when it has earned it and can be reasonably sure to get the money.</p>

<p>For example, Rickstarter could stablish in its service terms that it gets a 5% rate from any donation, and in this case it could be reasonable to consider a 5% of any received money to count towards the profits immediately. If there were a time for the investor to retreat his money without penalties, then the profits should only be accounted after that period. Or Rickstarter could apply a 5% rate to the money directed at projects that get enough funds, and in that case it could only write his profits in the book the moment the project gets that limit. In case that Rickstarter allowed people just to pledge the money, it would be unwise to count the profits before people had actually paid the money....<sup>3</sup></p>

<p>Now, direct taxes<sup>4</sup> on business are almost always directly linked to profits, not to the size of assets, so Rickstarter's taxes would be linked to its cut of the money (minus all expenses, of course) and not related to the size of assets that it keeps in scrow.</p>

<p>A different (and a lot more complicated) issue would come from regulatory obligations: there could be laws mandating that if Rickstarter manages more than $X assets then it has to start making audits and comply with other rules. But, while following those rules can have a cost, that would not make them "taxes".</p>

<p><sup>1</sup>The specific details of which kind of account would be convenient to reflect this obligation is beyond my knowledge of accounting.</p>

<p><sup>2</sup>Here <a href="https://www.accountingtools.com/articles/what-is-the-prudence-concept-in-accounting.html" rel="nofollow noreferrer">the prudence concept</a> comes into play, you cannot consider that you got your cut until you are reasonably sure that you have earned it.</p>

<p><sup>3</sup>This can become very complex. For example, in the case of a pledge RS would probably write as an asset "the $1000 SJuan76 owes us", but at the same time if there are doubts about SJuan76 ability or willingness to pay it should also anotate a liability of "the $1000 (or $500) SJuan76 might default" so it would not be count (at least totally) towards profits.</p>

<p><sup>4</sup>There may be taxes based on activity (e.g. sales tax) or related to some assets (for example property taxes on the buildings owned by the company), but I think you are not asking about those.</p>

<p>Rickstarter certainly operates on accrual basis.   So money landing in their "pocket" doesn't necessarily trigger a taxable event.  </p>

<p>When you deposit your paycheck in Wells Fargo Bank, Wells Fargo doesn't have to pay income tax on it because it's not their money.  They don't own that money.  Likewise, Rickstarter is nothing more than a bank for the money of yet-to-be-determined fate, so no tax there.  </p>

<ol>
<li><strong>When funds are distributed</strong> for a successful campaign, that triggers the txable event.  IRS collects tax on all of it as follows: Rickstarter gets 5% and that becomes part of its gross income, which will bubble down to the bottom if its Form 1120.  The recipient gets the other 95% and Rickstarter issues a "1099" tax document to both the recipient and the IRS... so the recipient had better account for it on her Form 1040, 1120 or 990. Here is where the recipient either pays tax on that money or explains why she should not (pretty easy if you file the 990). </li>
</ol>

<p>I highlighted <em>when</em> funds are distributed because the distribution is the triggering tax event: if it happens in April, <em>that's in the middle of the following tax year</em> so it is posted as income for that tax year.  </p>

<ol start="2">
<li><p>It wouldn't matter when funds from a failed campaign are refunded, because neither the collecting nor the refunding is a taxable event. </p></li>
<li><p>Ditto. Merely collecting the funds is not a taxable event.  No one has received them who would need to pay taxes on them.  So the money sits in limbo taxwise until a taxable event happens as in (1), or definitely fails to happen as in (2). </p></li>
</ol>
