In late September and early October 2023, southeastern portions of the U.S. experienced devastating destruction, leaving thousands of people stranded and homeless. Businesses, including those with affected employees, are looking to provide aid and resources for those facing hardships related to Hurricanes Helene and Milton. As many employers were also impacted, crowdfunding offers an appealing avenue to raise money for the benefit of its employees in need of assistance.
Key Takeaways
- There is minimal guidance on the taxation of employer-organized crowdfunding for employees, driving questions on whether crowdfunding contributions should be included in the gross income of the employer-organizer—especially as it relates to employer-organized campaigns for a group of employees and not a specific individual.
- Disaster relief under Section 139 of the Internal Revenue Code may provide employers with a potential option to aid impacted employees while utilizing crowdfunding to fund qualified disaster relief payments and allowing contributions to remain “tax free” for both employers and employees.
- Employers are discouraged from creating crowdfunding campaigns for specific employees due to potential discrimination and other concerns. Additionally, employers should avoid making contributions into crowdfunding campaigns for employees, regardless of the organizer.
- Employers should consult their tax and legal advisors prior to undertaking the use of crowdfunding campaigns.
Background
Crowdfunding services have significantly grown in popularity in recent years as they offer a simple yet effective way for organizers to raise funds to assist individuals, groups, or entities—particularly in times of catastrophe when public sentiment is high. This opportunity is not lost for employers who look to crowdfunding to raise money for their impacted employees. As it currently stands, there is little guidance on the taxability of crowdfunding, especially as it pertains to employers raising funds on behalf of its employees. What guidance does exist (mainly IRS Fact Sheet 2022-20 and Tax Tip 2022-120) provides that a crowdfunding organizer that raises money on behalf of others may not be required to include that money as gross income, provided the organizer gives the money to the individual for whom they organized the crowdfunding campaign. However, this guidance is not authoritative, and fact patterns become more complicated when the fundraiser is for a group of individuals and not someone specific. This is in part due to employers, as organizers, maintaining control over how the contributions will be distributed. It’s unclear whether this could jeopardize an employer’s ability to exclude crowdfunding from gross income.
In times of disaster, there may be a more tax-favored approach to distribute crowdfunded contributions. In response to the destruction caused by recent hurricanes, President Biden has issued various major disaster declarations. These declarations activated several relief provisions for affected individuals, including Qualified Disaster Relief Payments under §139. Utilization of this provision may permit employer-organizers to distribute crowdfunding to employees while maintaining the nontaxable status for both employer and employee(s). The following discusses two potential tax treatments for recording the crowdfunded contributions and subsequent disbursements. Taxpayers are advised to consult their tax and legal advisors before undertaking either approach as, absent guidance, there may be risk the IRS could take a contrary position.
Forvis Mazars Insight: Section 139, while well-established law, lacks in certain guidance, particularly on compliance. Consequently, employers are recommended to prepare a written §139 plan. For more information on these plans and §139 generally, see our FORsight™ discussing how §139 can be utilized to provide disaster relief to employees.
Approach 1 - Qualified Disaster Relief Payment
Under this approach, employers include the crowdfunded contributions in gross income, as absent any law specifically excluding it from gross income it would be included under §61, and then subsequently distribute them as qualified disaster relief payments under §139. To the extent the payments are qualified under §139, the amounts are excludable from employee income and the employer is permitted to take a deduction on the corresponding amount.
The Joint Committee on Taxation, in its report on the Victims of Terrorism Tax Relief Act of 2001, PL 107-134, January 23, 2002, stated: “Qualified disaster relief payments include payments, from any source, to, or for the benefit of, an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” Based on this, it appears that employers may be able to use crowdfunded contributions to finance §139 qualified disaster relief payments.
Forvis Mazars Insight: This option may be more appealing to risk-averse taxpayers as it utilizes the well-established qualified disaster relief law and results in a “wash” financially for both the employer and its employees (to the extent the raised funds are fully distributed as §139 qualified payments). However, this approach is limited to situations where a §139 “qualifying disaster” has occurred and when payments only cover certain expenses that are not reimbursed by insurance or other means (e.g., reasonable and necessary personal, family, living, funeral, replace or repair expenses, etc.).
Approach 2 – Passthrough of Bona Fide Donations
Under the second approach, employers do not include crowdfunded contributions in gross income as they are merely acting as an intermediary passthrough of bona fide gifts intended for the beneficiaries of the campaign. Per the Office of Associate Chief Counsel in INFO 2016-0036, the income tax consequences to a taxpayer of a crowdfunding effort depend on all the facts and circumstances surrounding that effort. For donation-based crowdfunding, there may be a position under the IRS and Chief Associate Counsel guidance to make a reasonable argument based on the facts and circumstances that employers do not recognize income from contributions if the contributions are considered bona fide gifts from the donors and the employer-organizer fully distributes the funds to the beneficiaries.
A primary concern with this approach is the employer maintains discretion over fund distribution (to who, for what reason, at what time, and in what amount). The IRS could take an adverse position against this approach because of this control maintained over the funds, requiring the amounts be included the employer’s gross income. It’s unclear what effect, if any, this would have on the disbursement of the funds.
Forvis Mazars Insight: This second approach may present even greater risk due to its subjective nature and the lack of strong, clear guidance—particularly as it relates to employer discretion, and especially in scenarios where the §139 approach is not available. In the event this approach is utilized, it may be best practice for the employer to attempt to reduce their discretion by establishing written procedures on how the contributions will be distributed and treatment of undistributed contributions.
Other Considerations
While income tax guidance appears to generally be supportive of an organizer not treating fully distributed crowdfunded contributions as income for campaigns with a specific individual beneficiary, tax is merely one of a plethora of other items (legal, business, etc.) that should be considered. Employers are therefore discouraged from organizing crowdfunding campaigns for employees, both as specific individuals and groups. If employers still wish to pursue such campaigns, tax and legal counsel should be consulted prior to establishing one.
Additionally, employers should avoid contributing directly to campaigns. Generally, employers cannot make nontaxable gifts to employees. Employers looking to provide financial aid to employees should make payments directly to employees through their payroll system, and if permissible, exclude the payments from compensation as a §139 qualified disaster relief payment.
How Forvis Mazars Can Help
With a robust presence in the southeast U.S., Forvis Mazars understands the needs of taxpayers during this challenging time. Mistakes are unavoidable in times of catastrophe and the crowdfunding campaign and §139 disaster relief rules are complex. Forvis Mazars has experience in these areas and can help guide you down a path to mitigate potential adverse tax consequences. If you have any questions on crowdfunding or §139, please reach out to your tax advisor at Forvis Mazars or submit the Contact Us form, and allow us to help.