Yesterday was the deadline for filing 2012 tax returns here in the United States, so I have taxes on the brain. I recently ran across a thought-provoking article on Salon.com that warns anyone running a Kickstarter–or any other crowdfunding–campaign to be aware of the tax implications. The IRS considers the entire amount of money that you receive, net of fees, to be taxable income. Amazon Payments, which handles disbursing payments from a Kickstarter campaign, also sends a 1099-K form to the IRS. So you are on the hook for that income.
Let’s take a look at this as a simple P&L for a theoretical $100,000 Kickstarter campaign:
|Kickstarter's 5% Fee||($5,000)|
|Amazon Payments' 3% Fee||($3,000)|
|Proceeds Net of Fees||$92,000|
|Taxes (assumes 25% rate)||($23,000)|
|After Tax Proceeds||$69,000|
Ouch! We just lost $31,000! To be sure, the costs associated with fulfilling the campaign would offset the income, but be sure to factor in the tax expense if you anticipate making a profit. This is especially true for projects that do not have a high cost of goods sold or are a pure donation, such as some artistic endeavors.
When picking a funding goal and establishing pledge levels prior to launching a Kickstarter campaign, taxes are not the only thing to account for. Other material expenses include:
- Shipping, particularly to international backers and for heavy shipments
- Manufacturing physical goods
- Sourcing and printing items such as branded t-shirts
- VIP treatment, such as travel or dinner with a famous person in the field
An essential analysis prior to launching the campaign is to break down your fixed and variable costs and work backwards from there:
- Fixed costs: What costs associated with this project are required whether you have one contributor or a thousand? The molds required to manufacture a plastic product are an example of a fixed cost.
- Variable costs: At each pledge level, what is the cost of fulfilling your promise to each additional contributor? Domestic shipping is an example of a variable cost (but be conservative in your estimates: longer distances can cost more). Kickstarter fees, Amazon fees, and taxes are also variable costs to factor in on a per-contribution basis. The difference between the pledge level and the cost to fulfill that promise is the contribution margin. To break even on your project, your pledges need to generate enough total contribution margin to pay for the fixed costs of your project.
- Step-function costs: Some variable costs decrease at higher volumes due to greater purchasing power. For example, you might spend $10 for each of the first 100 blank t-shirts that you are having logo-printed, but only $8 per shirt after that.
To arrive at a fully self-funded Kickstarter campaign, be sure to set the funding goal high enough so that the pledges supply enough contribution margin–net of ALL variable costs–to cover the project’s fixed costs. This will require some educated guessing as to which pledge levels will be the most popular, so be sure to factor in some buffer to account for the uncertainty.
Disclaimer: I am not a tax or legal professional. Please contact a certified public accountant or attorney for tax and legal advice.