Thanks to the widespread use of social media, crowdfunding—raising money from a large number of contributors—is becoming the easiest method of soliciting funds for charities, personal causes and startup microbusinesses.
However, whether you’re inspired to donate to a Facebook birthday fundraiser, a teacher’s Amazon wish list, a neighborhood family’s GoFundMe page, or a friend’s Kickstarter campaign there’s a lot you need to know before you click-and-pay.
Here are some common questions people often ask about crowdfunding.
1. Is your crowdfunding donation tax deductible?
Many crowdfunding sites have a symbol or other indicator that the organization is a registered charity and, therefore, tax exempt and eligible to receive tax-deductible contributions.
You can also go directly to the organization’s website to learn its tax status. In addition, the IRS has a tool called the Tax Exempt Organization Search (TEOS), which allows you to search any charity to determine whether it’s registered as a 501(c)(3) organization.
This search can also help you find out if the charity has had its tax-exempt status revoked, which can happen if it hasn’t filed the necessary paperwork for three consecutive years (among other reasons).
Whether you write a check or donate through a Facebook fundraiser, a donation to a verified 501(c)(3) organization is tax deductible. Keep in mind that some charities, like religious organizations, aren’t required to have 501(c)(3) status, but donations to them are still tax deductible.
A donation to an individual, on the other hand, is not. While giving money via GoFundMe to a family having trouble paying medical bills or to Kickstarter to help a friend launch a new business, these donations are not tax deductible.
Of course, the tax-deductibility of any kind of donation is only relevant if you itemize deductions, rather than use the standard deduction of $25,000 for married couples filing jointly (or $12,500 for single filers).
2. How can you tell if a request for donations is legitimate?
While it’s fairly easy to use the IRS search tool research a charitable organization’s tax status and government filings, this information alone doesn’t necessarily provide insights into the organization’s reputation and its use of donations.
For this kind of research, tools like Charity Navigator and Charity Watch provide ratings of nonprofit organizations in a number of areas, including financial reporting and administrative costs. Consider looking up any charity on either one of these sites before you give.
For donations to individuals, you’re essentially on your own. It’s up to you to determine whether that person’s need is legitimate, or whether they’re committing fraud.
GoFundMe claims that fewer than one out of 1,000 appeals are fraudulent, and offers a one-year guarantee wherein you can submit a claim through the site if you think you’ve contributed to a fraudulent fundraiser within that period. If its experts determine your donation went to an illegitimate cause (note: this determination is at the discretion of the site), you will be refunded in full.
Kickstarter, on the other hand, offers little or no recourse for donors and even less protection from fraud. According to analysis from the University of Pennsylvania, one in ten Kickstarter projects fail, and when they do backers only receive refunds 13% of the time.
3. What percentage of donations actually goes to the charity?
This varies from site to site, and it’s worthwhile for you to do some digging to make sure your gift has the largest impact. GoFundMe, for example, deducts a transaction fee of 2.9 percent plus $0.30 per donation.
Facebook doesn’t charge transaction fees for donations to charitable organizations but does deduct a 2.6 percent plus $0.30 processing fee for donations to personal causes.
Check the details on the specific platform you’re planning to use to help you determine whether it makes sense to donate through that site or another way.
If you give directly to a charity via credit card, they may have to pay a processing fee out of your donation. However, some charities do give you the option of paying that fee as part of your donation.
And the benefit of giving directly to a charity is that you’re assured that all of it is going to the charity the moment you give it. When you donate through Facebook or GoFundMe, you have no control over how long that platform will hold on to your donation before they pass it on.
Don’t be afraid to give online
Giving via social media can help you feel that you’re part of an online community that shares a common goal of supporting a favorite cause, helping an individual or family in need, or giving an aspiring entrepreneur the chance to bring their idea to life.
However, like any online transaction, it’s important to make sure that the organization or person you’re giving to is legitimate, and that the money you give is being used for its intended purpose—and that you have recourse if it’s not.
Although we go to great lengths to make sure our information is accurate and useful, this material has been provided for general informational purposes only and does not constitute either tax or legal advice.
Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or email@example.com
©2023 Commonwealth Financial Network® and Canby Financial Advisors.