Crowdfunding? Don’t Forget About Unfulfilled Pledges, Shipping & Taxes

As crowdfunding music moves closer to becoming a mundane choice for doing business, we’re also getting a fuller picture of not just the possibilities but also the pitfalls. In particular, the need to recognize that not all pledges ultimately come through, that fees will be charged by the crowdfunding service, that it costs money to create and ship physical rewards and that taxes will be due on money received all have to be taken into account. These issues should be part of one’s basic budgeting that takes place prior to setting a funding goal.

Even given the obvious difficulties of mobilizing one’s fanbase to generate funds, it’s easy to look at the numbers on crowdfunding sites and forget about all the underlying expenses that will chip away at that pledged total. If you’re crowdfunding a music project, you might want to take into account the experience of a successful game developer that raised $36,967 on Kickstarter exceeding their goal of $20,000:

“We lost about $2,000 to no-shows, just people that pledged and the funds did not transfer.”

“Kickstarter and Amazon Payments take their portions, which got us down to right around $32,000.”

“$10,000 for prize fulfillment.”

“From there:
Music – $6,000
Attorneys, startup fees, CPA – $4000
Poster art – $2000
iPads – $1000
PAX East – $3000″

“Leaving us with around $6000, which is income, so that was taxed.”

“So we’re right around $4000 remaining and even that cursory math isn’t working as there are other things that weren’t big tickets but sapped the coffers.”

That’s a sobering account, isn’t it? But that’s what budgeting is for. You have to think through every stage and do such annoying and time-consuming tasks as figure out what it will cost to create and ship every bit of merch you offer as rewards. It’s just part of business but much of this process will be new to indie musicians who have played it by ear and paid for everything out of pocket to date.

Here’s a useful note about taxes from Scott Steinberg’s The Crowdfunding Bible (free download):

“Be aware of the potential tax implications of any investment dollars raised via crowdfunding campaigns. Consult a certified professional, such as your financial advisor or CPA, regarding how and when taxes must be paid on this income, and allocate funds appropriately. Note that initial research to this extent should always take place before you launch your campaign. You will want to pay close attention to when your campaign ends relative to the end of each tax year, and how any unspent portion of income generated thereby will be treated at the end of that period.” (p. 53)

At the end of the day, all these issues are fairly mundane unless one hasn’t considered them. If it catches you by surprise, as the news that Kickstarter pledges are not tax deductible caught Tracy Silverman, then an initial period of shock may set in. Once you get past that, it’s time to get back to work on that budget!

More: Martin Frascogna: 3 Legal Tips for Amanda Palmer-style crowdfunding

Hypebot Senior Contributor Clyde Smith (@fluxresearch) maintains a business writing hub at Flux Research and blogs at Crowdfunding For Musicians. To suggest topics for Hypebot, contact: clyde(at)fluxresearch(dot)com.