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Apr 26, 2017

Go Fund Me and the Tax Implications

Paul Pocalyko photoBy Paul W. Pocalyko, CPA, CFF, CFE


MoneyLife100During tax season, I had an interesting inquiry from an acquaintance regarding a donation he made to a worthy cause. A relative of his had some significant medical issues, and the bills were piling up. The family had started a Go Fund Me account as a way to raise money for the mounting costs. My acquaintance provided a generous donation that he hoped would be tax deductible. As with any tax question, every situation is different and there are no simple answers.

Generally, he had made a gift that would not be tax deductible. His response was, “OK, it is not big deal for me, but does that mean my sick relative will owe taxes on all those donations? I don’t think they could afford a tax bill.”

There is a good likelihood that no tax would be owed in this instance, but preventative steps should be taken to avoid a long tax battle.

There are many stories about people who raise money through crowd funding sites and wake up one day to find a big tax bill in the mail. Clearly, when someone is gravely ill and facing mounting medical expenses, the last thing on the mind is the tax implications related to the gifts that aided in the payment of obligations. Generally, these individuals believe that the gifts are tax free, and as such the income is never reported on the tax individual’s tax return. In some cases these individuals have so little actual income that a return is never filed. Then the IRS letter shows up indicating that taxes, interest, and penalties are owed – an event triggered by a 1099-K.1

Typically, money raised through a crowdfunding site such as Go Fund Me is processed through third-party settlement entities such as PayPal. IRS rules for those processing entities are very clear regarding the requirement to issue the 1099-K:

The settlement of third-party payment network transactions above the minimum reporting thresholds of

  • gross payments that exceed $20,000, and
  • more than 200 such transactions.2

Thus, a taxpayer that gets a 1099-K should be prepared to deal with that information on the tax return. Just because a 1099-K is issued, however, does not mean that the recipient owes taxes on the funds. One potential manner to report this is to include the amount on the 1040 as “Other Income,” and reflect a negative adjustment in the same amount with the inclusion of a “Statement Concerning” the position taken. If appropriate to the situation and in consultation with a tax professional, a statement could read in part:

All amounts reflected in the 1099-K are excludable from income under IRC Section 102.3 These amounts reflect the money taxpayer received as the result of gifts from donors. Those gifts were used to pay the medical expenses of the taxpayer and are excludable from gross income.

How does one truly know the money was a gift? There is little within the code regarding the definition of a gift, but the tax courts provide some guidance:

Gifts result from "detached and disinterested generosity" and are often given out of "affection, respect, admiration, charity, or like impulses."4

So while the gift my acquaintance made was not tax deductible on his return, with some level of relief, it appeared the donations obtained by his ill family member were not going to create a tax obligation.

The underlying interpretations and rules regarding any Go Fund Me account can create significant tax questions and raise significant tax issues to the recipients.5 Each case is different. If, for example, a now-retired professional athlete has come on hard times and is looking for donations to help with his mounting debt and legal bills, a tax obligation is likely in the athlete’s future for any donations obtained.

When a young, enterprising entrepreneur looking to make her first million is seeking donations to aide in the development of her new software product and its launch, those amounts will be subject to income tax. The profit motive takes away the likelihood of tax avoidance.

So when faced with the need or desire to create a crowdfunding account, it is important to consider consultation with a tax professional who can guide the taxpayer through the myriad issues they may face. No case is ever the same, and each person’s individual circumstances will require separate guidance.


1 https://www.irs.gov/businesses/understanding-your-1099-k
2
Ibid.
3
https://www.irs.gov/pub/irs-drop/rr99-44.pdf
4
Commissioner v. Duberstein, 363 U.S. 278 (1960)
5
https://support.gofundme.com/hc/en-us/articles/204295498-Am-I-responsible-for-taxes


Paul W. Pocalyko, CPA, CFF, CFE, is senior vice president, construction claims and consulting services, at Hill International Inc. in Philadelphia. He can be reached at PaulPocalyko@hillintl.com.



10 comments

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  • James DeLuccia | Feb 25, 2019

    Lynda,

    Paul's response is below.

    Generally no, but it requires careful consideration when you prepare your tax return. You would report it on the tax return and show an offset regarding the charitable purpose and efforts in a Statement Concerning. It is best to consult with your own tax adviser CPA as every situation is different.

    Jim DeLuccia - PICPA Team

  • Lynda | Feb 24, 2019
    Would l have to pay taxes from a GoFundMe account if the money l am collecting is going to help someone else and not myself. I am on a limited income myself and don't want ti end up getting hit wiyh a big tax bill from the IRS.
  • George | Nov 29, 2018

    Hi Paul,

    Same situation with Denise's comment. Any words of advice?

    Thank you

    George

  • Denise | Nov 13, 2018

    I have been asked to help set up a GoFundMe account for my cousin who lives in Mexico. (My mom was the only one of her siblings to emigrate to the US). I was requested to di thisbecause GoFundMe does not support accounts made bynor for citizens of Mexico. 

    How can I help, but avoid being taxed for the donations, as well as avoid being taxed for any significant donation accumulation (once the campaign concludes, assuming successful.). My cousin needs the funds to pay for very expensive chemotherapy.

    thank you

  • James DeLuccia | Oct 05, 2018

    Camille,

    Thank you for your question. According to Paul, there is no "yes or no" answer. It is all fact specific and you should review the details with a CPA tax specialist.  

    Jim DeLuccia - PICPA Team

  • camille | Sep 29, 2018
    I would like to have a Go Fund me accont to pay for my legal fees. Do I have to pay taxes on the money?
  • Noël Johnston | Aug 18, 2018
    I have an indigent, disabled friend who has Section 8 housing and collects a monthly SSI check which covers some, not all of her expenses. She is 53 years old and due to disabilities, not able to do much work.  She seemed like an ideal candidate for a crowdfunding account but she has been told that it (like any 1099 work) would imperil her Section 8 housing, her SSI payments and her benefits.  The benefits are really important to her because her medical bills are substantial. In short, it is almost impossible to figure out how to help her other than simply paying her bills.
  • Steve Cannell | Mar 31, 2018

    I believe that since there is no obligation to pay and no right to receive the donation that it is motivated solely out of personal Benelovance.  A gift under $14,000 by an individual does not have to be for medical reasons and the recipient is free to spend according to their desire...............I'd think even if they invested it in a business.....in any case any gift over $14,000 would still not be taxable to the recipient but maybe a taxable gift by the donor depending on where they stood with the "lifetime" exemption.

    I don't see any case for the inclusion of these fragmented and disinterested payments to be considered income.

     

    Steve Cannell

    sccannell@gmail.com

  • Paul Pocalyko, CPA, CFF, CFE | Sep 25, 2017
    Because the business appears to be a for-profit business any funds obtained through a Go Fund Me account would be considered income to the business. You would, however, be able to deduct repairs expenses incurred, which could reduce the potential tax impacts.
  • Sarah Hellevang | Sep 22, 2017

    Excellent article and very informative.  Thank you.

    I am looking to start a GoFundMe account after our business building sustained severe damages during Hurricane Irma.  Since this is a business that would ultimately be generating money, would this less likely to be considered a non-taxable gift?

    Regards,

     

    Sarah

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