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Crowdfunding for Donations
Crowdfunding for Donations
The term "crowdfunding" has recently sprung into use; but because there are different forms of crowdfunding, it's not always clear what this new term means. Simply put, crowdfunding is raising money from a crowd—and typically, it refers to raising money over the Internet. This alert focuses on one type of crowdfunding: crowdfunding for donations, i.e., crowdfunding where money is requested but no services or goods are offered in return.
Background and Definition of Crowdfunding
People have always asked one another for money: we ask when a child or relative is sick, impoverished, or otherwise suffering; we ask on behalf of our favorite charities and causes; we may even ask for money to start a business. Commonly, we ask family and friends, co-workers, and other acquaintances; sometimes, we ask those we don't know. As technology has changed, so have the ways we ask for money. Now, through social networking (Facebook, Twitter, Linkedin, etc.), we can easily ask hundreds of people for money; and our friends can easily share our requests with their friends, thus reaching thousands. In this way, funds can be raised from a large "crowd" of people for all manner of causes. This is crowdfunding.
More formally defined, crowdfunding is a collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.
There are many crowdfunding platforms (which, generally speaking, are websites); several popular ones include GoFundMe, IndieGoGo, and Kickstarter. Different sites often focus on different sorts of fundraising projects: some focus on raising money for individual causes and charities; others raise money for artistic projects (music albums, books, movies, video games); others fund proposed inventions or products; and still others combine many or all of these features. Typically, users can create their own projects, which are then hosted as webpages on the crowdfunding website; then, users can share these projects-or other crowdfunding projects they support-using their social networks, thus allowing the projects to reach a wide audience of potential donors.
Crowdfunding is simply another way to ask people for money. As with any other way of soliciting donations, there will always be scammers trying to exploit the generosity of donors. Thus, the cardinal rule for all charitable giving remains—donor beware. Here are some questions to consider before donating:
- To whom are you donating? Are you sure of the solicitor's identity? Could it be someone masquerading as someone else?
- How do you know that the money you donate will be spent appropriately? Public charities are subject to auditing requirements and other disclosure rules; you can research them at various sites, including AGCharitySearch, Charity Navigator, the Better Business Bureau, and Guidestar. Is your intended recipient transparent and accountable?
- If donating to an individual: Is it someone that you know? Someone that you trust? Is the amount being raised reasonable or does it seem excessive? When giving to an individual, it can be difficult to know for sure that the recipient will use your donation as you intend it to be used. Use your best judgment; if in doubt, don't donate.
- If the fundraiser is using a crowdfunding platform such as GoFundMe, take note of the description and organizer. If the organizer claims to be connected to the recipient, you can verify by searching their name online and on social media. Often other posts from the person will be public and can help verify authenticity. Additionally, news articles will often feature verified fundraisers; lean on those if you're looking to give during times of community tragedy.
Frequently Asked Questions
1. What if you're concerned that the donated money is being diverted to another purpose, i.e., you suspect that the recipient is using donations to enrich himself or herself?
If you suspect or have evidence that donations to individuals are not being used as described by the solicitor, you may contact local law enforcement. Donations to named individuals are not considered "charitable" under the law and thus are not subject to regulation under Michigan's Charitable Organizations and Solicitations Act (which regulates solicitations for charitable purposes).
If you suspect or have evidence that donations to a charitable organization are not being used as described by the charity, you may contact local law enforcement or the Attorney General's Charitable Trust Section. Under the Charitable Organizations and Solicitations Act, the Charitable Trust Section registers charitable organizations that solicit from the public and you can confirm with the Attorney General's Charitable Trust Section whether a charity is registered; both the Attorney General and local prosecutors have enforcement authority under this Act.
The Attorney General's Charitable Trust Section may be contacted at:
Charitable Trust Section
P.O. Box 30214
Lansing, MI 48909
2. Can you take a federal tax-deduction for donations given through crowdfunding sites?
Maybe. Under the federal rules for charitable tax deductions, donations are only deductible if made to qualified organizations-generally, 501(c)(3) charities-and if properly documented. Donations to individuals are not tax-deductible. For more detailed information, see IRS Publication 526 or discuss with a tax professional.
3. If you are an individual that is using crowdfunding to solicit, do you need to register with the Attorney General before soliciting?
Most likely, no. Traditionally, for a donation to be considered "charitable" under the law, it must be for the benefit of the public and not for the benefit of an individual-regardless of how worthy that individual's cause may be. Consistent with this traditional rule, Michigan's Charitable Organizations and Solicitations Act exempts from the Act's registration and reporting requirements those solicitations conducted by volunteers for the relief or benefit of named individuals. See MCL 400.283(a). For more information regarding Michigan's charitable solicitation requirements see, the AG's website here.
4. Is it permissible to use crowdfunding on behalf of a charity you support?
Only with permission of the charity. Fundraising on behalf of a charitable organization is prohibited "without first obtaining written authorization from that charitable organization." MCL 400.288(c). And with many charities already using crowdfunding platforms themselves, instead of creating your own crowdfunding webpage, you may simply want to share the charity's own fundraising webpages through your social networks. This will bring your favorite charities to new potential donors-and no permission is necessary.
5. Are crowdfunding gifts taxable income for recipients?
The answer to this question is beyond the scope of this consumer alert. Instead, this question serves as a reminder to those engaged in crowdfunding that the gifts they receive may be taxable under either federal or state law. Recipients of crowdfunding gifts should discuss this issue with a tax professional.
For more information on crowdfunding for charitable causes, see the Better Business Bureau's Guide, "What to Know Before Donating to a Crowdfunding Cause."
The Federal Trade Commission also has useful consumer information on its website.