How to Account for Kickstarter Funds

You think that your problem is not having enough money. After your Kickstarter campaign, you may just feel that you have more than you know how to handle. Of course I don't mean that you won't find a way to use the extra funds, but that all income arrives with a price tag: Tax.

Raising the funds to create the project is what saturates most creators' attention, making important accounting principles a panicked afterthought, or worse, a regretful memory.

I should stop here and say that while I do have my M.B.A. and have personally had to work through these issues at WP Films, I am not an accountant and you should definitely consult one regarding your campaign funds.

Thankfully, there is a really easy way to explain how Kickstarter funds should be accounted for. The technical name for this solution is the accrual accounting method.

In any business, whether service or product-based, there are two events that you need to pinpoint.

  1. When you actually get paid from your customers

  2. When you fulfill your obligation to them.

In the simplest businesses, these two things happen at the same time, making the accounting rather simple. But you can imagine many scenarios where these items are separated by amounts of time and aren't even in the same order.

In any situation where credit is involved, the service or product is provided, and the payment may come 60 days later. On the flip-side, when you purchase airline tickets you may pay months in advance of actually packing your bags.

Kickstarter definitely falls into the category where customers pay first and your obligation to them is fulfilled much later. This can create a major tax liability when all the income from your campaign comes in one fiscal or calendar year, and you aren't spending all of those funds on your project in the same year.

Accrual accounting helps us line these events back up so that less of your campaign funds are lost to the government. This requires you to keep track of all of your reward tiers and exactly when you fulfill your obligations to them.

You only have to claim the income from reward tiers once you fulfill those obligations.

Here is how to deal with some standard reward options:

  • The Thank You: Assuming you aren't promising a physical thank you card, you will have to claim the income from this reward tier at the time where the cash hits your bank account.
  • The Product: This is what you are making! You will want to claim the income from this reward tier once you have actually shipped this reward. Keeping track of when the product is actually delivered is just too difficult for most small businesses, and as long you aren't shipping product around New Year's Eve or the end of your fiscal year, it won't make any difference.
  • The Experience: You may have already guessed this one, but you will claim the income from this reward tier once you have finished providing the experience to these backers.

Now, this will be as complicated as you make your reward tiers. If you have a mixed reward tier that includes both an experience and a product for $100, you will have to make a reasonable decision (that the IRS would agree with) about how much of that pledge covers the product and how much covers the experience. Because most campaigns have single products in lower tiers that are also included in higher tiers, this should be fairly easy for you to figure out.

Armed with this information, you have the ability to customize your rewards to better balance out your Kickstarter income with your project expenses, which leaves you more money to make your idea awesome!

Technical Notes: All Kickstarter income that doesn't have to be claimed immediately becomes a liability on your balance sheet until you fulfill the obligation, at which point it will be moved from your liabilities to show up on your Profit and Loss Statement as income. Your bookkeeper will need to know this if they aren't familiar with accrual accounting. Also, if you have been using the cash accounting method in your business, you may have to file a form with the IRS to change to the accrual method.