I am pretty sure that you don't have to spend all income the year you receive it to avoid paying taxes on it. One of the foundations of accounting is the matching principle: "Expenses are recognized when obligations are (1) incurred (usually when goods are transferred or services rendered, e.g. sold), and (2) offset against recognized revenues, which were generated from those expenses (related on the cause-and-effect basis), no matter when cash is paid out." http://en.wikipedia.org/wiki/Matching_principle

There are multiple ways to match income and expenses that occur in different years - at least if you have some sort of business entity.

Most of the folks on Kickstarter don't have the necessary business entities set up to take advantage of that.

I would agree with that for the most part, however, if you're receiving a large sum of money (e.g. the $8 million dollars Ouya received as mentioned in the article received) I think you owe it to your investors to take the time to set up those business entities.

Just to use a widely known example - Pebble that raised millions of dollars on KS. In Pebble's case, each donation was tied to a pre-order. Since the watches have not been delivered, that money is not recognized as revenue on Pebble's income statement. Instead, it is "Deferred Revenue," a liability on Pebble's balance sheet. So, Pebble got an asset (cash) but incurred an offsetting liability (Deferred Revenue). There is no change in equity value, and there is no income until the revenue is recognized (watches are delivered).

Cash method taxpayers do not get to take advantage of "matching principles". They must report income when received.

Matching principles only apply to accrual method taxpayers, who may record invoices or liabilities separately from the actual payment or receipt of payment.

Sorry, it really didn't occur to me that people who raised that much money would not have a business, but maybe it's more common than I thought.

I like that. From now on I'll tell people I'm both "Patron of the Arts" and "Patron of the Startups" on Kickstarter.

Agreed. Its too bad kickstarters just can't sell super-minority shares with a nominal face value. So if they are trying to raise 50K, just sell a 1% share of the company for $50K (so each share is a $1 say, and there are 5M shares).

It would make the process much more enticing from the funding side, since you could feel you were perhaps getting in on the ground floor of something significant.

There are other complexities that prevent this however, for instance SEC regs would certainly get in the way (only qualified investors, proper risk disclosure, etc etc).

The JOBS Act will let companies set up Kickstartr-style funding portals for small investors.[1] It was signed in April, but the SEC is still in the process of defining how it will be implemented.

[1] http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...

Thanks for posting this, I was unaware.

However, still seems like a bit of a hassle: "One of the conditions of this exemption is a yearly aggregate limit on the amount each person may invest in offerings of this type, tiered by the person′s net worth or yearly income. The limit ranges from 2% of people earning (or worth) up to $40,000, up to a cap of $10,000 for people earning (or worth) $100,000 or more."

Presumably, the onus will be on the funding channel (i.e. kickstarter) to validate these accreditation rules of their investors. If there is a big hesitation for new users to simply register an email/password for a site, imagine when you are asking them to also submit tax returns and copies of ID.

Don't get me wrong though, I guess its better than nothing.

>There are other complexities that prevent this however, for instance SEC regs would certainly get in the way (only qualified investors, proper risk disclosure, etc etc).

Not to mention, as I understand it, there are some pretty strict rules about how you a company is allowed to solicit investments, and the Kickstarter format would be in violation of approximately all of them.

Yep, its a minefield (of course like most things, these regs exist to protect special interest).

I'm sure there is some bright attorney who could figure a way around it (ie. its an unsecured loan, that contains a very permissible default clause, which is potentially convertible to an equity share upon event a, b, c happening). Or more simply, just host the site in Hong Kong or somewhere and escape US jurisdiction.

I know that none of this will never happen, just talking out loud....honestly, the first time I heard about Kickstarter, I thought this was the idea and I was excited. Then I discovered it was "act like a angel investor, fund my idea, and if 1000 things go right you will get a free tshirt". Meh.

Given the Jobs act, I'm wondering how this will all get sorted out w.r.t. blue sky laws, etc... gonna be messy and full of fraud at some point.