Go Fund the IBF or Kickstart my Potato Salad?

By Adam Christensen, Dutton Legal Group

It’s tax season, which means it’s time to atone for the tax sins of 2015 and pledge to do better in 2016. Let’s see if you’re ready.

Which of these cash donations nets you and the recipient the best tax result?

Contribution to the Indianapolis Bar Foundation (IBF)

Contribution to a private GoFundMe.com page for a neighbor who lost her home in a fire

Contribution to a kickstarter.com page for someone to make potato salad

Contribution to the IBF

This one is simple. The IBF is a qualified organization that uses donations to provide support, outreach and educational opportunities for Indy residents in need.

This means your entire gift is deductible, less any benefit you received in exchange for your contribution – say, the fair market value of your round of golf for the Lawyer Links Classic on July 14 (hint hint).

Result: You get a deduction, and the IBF puts your dollars to good use. Grade: A+++

Fire Relief GoFundMe

This one is less straightforward because the Internal Revenue Service currently offers no guidance on donation-based crowdfunding. Still, most tax advisers agree that this kind of donation made out of “detached and disinterested generosity” amounts to a gift.

Generally, any individual can donate up to $14,000 per year to anyone else without creating tax liability for either party. However, you, the donor, will not get a deduction because the recipient is not a qualified organization.

But beware: stories have cropped up of the IRS auditing recipients of GoFundMe donations and attempting to force them to include their gifts as taxable income. These fights are ongoing, and it seems like the IRS will lose, but the risk of an audit remains.

Result: A good cause gets funded (though maybe audited), and you don’t get a deduction. Grade: B+

Potato Salad Kickstarter

Wait, you didn’t hear the one about the guy who used crowdfunding to make potato salad? It’s not a joke. Well, it was at first, until the Internet, like a sardonic genie, got involved.

In 2014, Zack Danger Brown (sigh) started a Kickstarter page to raise $10 for making a batch of potato salad. Within a few months, more than 6,000 backers donated $55,000 to the “cause.”

Such is the Internet’s strange brand of humor and justice.

In the end, after skirting Kickstarter’s rules against making direct donations to charities, Mr. Brown used most of the cash to throw a party to raise funds to fight hunger. Reportedly, the party netted $18,000.

That makes for a nice story, but turning $55,000 into $18,000 is not a sound result. The root (pun intended) of the problem is in the tax code.

While the IRS has offered no direct guidance, tax professionals agree that creative enterprise crowdfunding activities like Brown’s potato salad are not gift transactions. The funds are taxable income to the recipient, while the donor likely cannot claim a deduction. The recipient may be able to deduct expenses related to the activity (e.g. potatoes), but any profit will be taxable.

Result: You don’t get a deduction. Brown gets a tax bill, fleeting Internet fame and 3,500 pounds of potato salad. The Internet wins, but the rest of us lose. Grade: D-

The contents of this article are not intended as tax advice. Consult your tax adviser before making any charitable donations. Consult your physician before eating Internet potato salad from a guy with “Danger” as his middle name.•