By Paul W. Pocalyko, CPA, CFF, CFE
During 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
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.
4 Commissioner v. Duberstein, 363 U.S. 278 (1960)
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.