By James DeRuvo (doddleNEWS)
Crowdfunding portals like Indiegogo, Kickstarter, and Seed & Spark may give filmmakers much needed capital for any projects they want to get off the ground, but what if you have an ongoing web series, or an ambitious slate of shorts that you want to raise funds for? Surely you don’t want to hit up your backers every few months with yet another campaign, and go through the whole process over and over again. That’s where Patreon comes in. It lets filmmakers create an ongoing pathway of support that just doesn’t end with one film. But even with that, there’s one hidden time bomb that all successful crowdfunding campaigns have to deal with… the tax man.
“Patreon enables fans to give ongoing support to their favorite creators. It’s different from Kickstarter because it’s not about one big project that requires lots of funding. It’s for anyone who creates on a regular basis.” – Patreon’s introductory video
The idea behind Patreon is pretty simple. You have a favorite short filmmaker on YouTube, podcaster, musician, or even a web comic producer who is creating content consistently throughout the year. Patreon backers (known as Patrons) can set a monthly “tip” budget for their favorite content creator, and then release that tip as new content comes out. This allows the content creator to know on an ongoing basis what they can budget for any upcoming project. It’s kinda like what would happen if HBO and Kickstarter had a baby, and it’s entirely based on what you think the project is worth.
Patreon was founded in 2013 by Sam Yam and Jack Conte, with the goal of enabling fans to support and engage their favorite artists and content creators. The campaign works in similar ways to Kickstarter in that content creators set rewards levels based on milestones reached. This could be hi-res video downloads, exclusive live Google Hangouts, or even behind-the-scenes tutorials of how they did what they did.
Making YouTube videos is a full-time job for us. Everyday we are developing, shooting, and editing videos so that you (The Fans!) can watch them for free. While we do receive a modest revenue for making YouTube videos, this money goes directly back into running our small production company. Even though we’ve become specialists at “making cinema quality videos on a low budget,” having little to no money for a “production budget” when approaching videos ultimately creates significant creative limitations. – Corridor Digital’s Patreon Page
A good example is the gang over at Corridor Digital, who recently started their own Patreon community with the goal or budgeting $10,000 for every short video they do. I’ve been a fan of Sam and Niko ever since they released Frozen Crossing, based on the Modern Warfare video game. It’s very cinematic and well shot. But they’ve also did a great web series called Sync, and their latest video – Superman with a GoPro, has really taken them to the next level with the same big budget look, but all too often is shot on a shoestring budget.
As a result, they turned to Patreon to try and put together a higher quality budget and engage their fans into supporting them. “It’s pretty simple really,” writes Sam and Niko on their Patreon page, “by giving your support through Patreon, we can deliver on hundreds of creative ideas we’ve been forced to forego due to high production costs associated with things like locations, known actors, and cinema-quality equipment.”
Currently, Corridor is over half way to their $10,000 per project goal, with many of the current 750 Patrons giving a few bucks per project. For just $3.00 for example, Corridor will offer Blu-ray downloads of all their programming, and $20 per project gets Patrons exclusive behind-the-scenes tutorials of their special effects. Even more gets you all the assets themselves to work on and improve your own skills.
We can’t give tax advice … In general, in the US, funds raised on Kickstarter are considered income. In general, a creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes. If a creator receives funding in one year and spends money on their project in a later year, consider whether their expenses can still offset their Kickstarter funding using the accrual method of accounting. – Kickstarter and Taxes
But even with the ability to raise funds through Patreon, or even Kickstarter or Indiegogo, filmmakers have to be prepared for expenses that simply aren’t in their budget. Already, all crowdfunding portals take a percentage of the cut, as does Amazon and Paypal for processing charges and drafts for pledges. This can account for up to 10-15% of the entire amount raised. And many successful campaigns, on their face, have stalled because they didn’t take this amount into consideration and built it into their campaign’s bottom line.
But even more so are taxes. Yes, that’s right, Uncle Sam wants his cut as well, and that can end up being up to 44% of the entire campaign. And if it boosts you as a filmmaker into a high tax bracket, it could be even more, because from the point of view of state and federal governments, this is income, not free seed money.
So how can you lessen that impact? Well, NoFilmSchool offers the following tips:
- Run your campaign at the beginning of the year. This gives you 12 months to spend it and account for all your deductible expenses when tax time rolls around.
- Factor it in. Make sure you include your fees for processing payments and taxes into your bottom line. This way you’re not surprised.
- Pad your budget. All filmmakers pad the budget a bit for contingency (and insurance). This provides for a way to deal with the unexpected.
- Use an accural method which will tax you as you earn the balance, not when you receive it. This gives you more time to spend it, apparently.
- Account for everything and include it with your taxes, so you can justify taxable income vs. gift income
- Incorporate. Or at least create an LLC which can shield your income from that of the project income and keep you in the right tax bracket. And do it BEFORE you raise the money as it may not be possible to change your status with Amazon after money begins to trickle in.
However way you choose to raise your money in crowdfunding, the bottom line is, talk to your accountant. Protect yourself. And have a strategy. You can also learn more about crowdfunding from our doddleTALKS TECH episodes here and here.