Kickstarter Bands: Can Uncle Sam Touch Your Money?

By: Tessa Stuart

Boy band Allstar Weekend are Poway's answer to One Direction. The San
Diego county-bred group got its start on the Disney Channel music
competition Next Big Thing back in 2009. They took second place
on that show, but the exposure helped the band ink a four-album deal
with Hollywood Records, book a tour with Selena Gomez and score a few
spreads in J-14 magazine.

Two albums into their record contract, though, Allstar Weekend and
the label ran into “creative differences.” The latter wanted to continue
milking the younger demographic, the former wanted to make more mature
music, and they parted ways.

To fund their next work, this summer Allstar Weekend turned to
Kickstarter. The trio, now living in Burbank, made a video asking fans
for help and compiled a list of rewards for donating.

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A $15 pledge was good for an early digital release of the new album.
For $5,000, one received a slew of autographed merchandise and a full
day hanging out with the band at Disneyland or Universal Studios.

The campaign was a huge success, raising some $96,000 — more than
three times its $30,000 goal — including three fans who ponied up
$5,000 apiece.

“It's cool,” 23-year-old lead singer Zach Porter says of one top
donor who recently cashed in her reward. “She was just a really big fan,
and we got to hang out with her all day.”

It's hard to imagine something like this happening even as recently
as a few years ago. But nowadays this type of crowd funding, along with licensing, can feel like the only things keeping the record industry afloat.

Because of illegal downloading, it has grown increasingly tough to
make a profit selling music; industry experts once suggested that
full-time musicians could make up their losses via touring performances
in front of … all the fans who stole their music.
But so far that doesn't seem to be doing the trick, so platforms like
Kickstarter, Indiegogo and PledgeMusic — which is sort of like
Kickstarter but exclusively for musicians — have stepped in.

Artists now can ask fans directly: How much is our music worth to
you? To many, the answer is, “a lot.” Since the platform launched in
2009, Kickstarter has helped fund more than 30,000 creative projects —
records, films, graphic novels, inventions — raising a whopping $400
million.

Although it has the reputation for being the domain of unknowns,
Kickstarter increasingly is becoming the first choice of the famous,
too: Amanda Palmer raised more than $1 million there this year.
PledgeMusic funded Kate Nash's new record. Ben Lee, Here We Go Magic and
10,000 Maniacs all have campaigns in progress on the site.

But crowd funding might not be a panacea for the industry, and in
fact it's not nearly as easy or cost-effective as it sounds. Unseen
costs, fees and taxes can take a big bite out of a band's big payday.

For starters, the IRS wants in on the action.

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In 2011, the agency introduced the 1099-K form. While it doesn't target
crowd funding specifically (no, the K doesn't stand for Kickstarter) —
it is meant to keep track of third-party credit-card transactions, such
as the pledges that Amazon processes on behalf of Kickstarter. Thus,
anyone who raises more than $20,000 or logs at least 200 transactions on
Kickstarter is required by the IRS to file the form. Don't think you
can weasel out, either, because Amazon reports the information to the
government.

The fact that the IRS is quietly accounting for the money raised on
Kickstarter is catching some artists off guard — like Zach Porter of
Allstar Weekend, for example. “That is definitely something that I have
to look into,” Porter says.

In January, local singer-songwriter Ari Herstand raised $13,500 from
222 backers for recording costs — which means this year he'll have to
file a 1099-K. When pressed, he admits that he has no idea what his tax
responsibility will be, and Kickstarter provides little information
about the subject on its site.

A Kickstarter representative declined to be interviewed for this story, and no one from the IRS would speak with the Weekly, either — pointing us only in the direction of published material, of which there isn't any yet about crowd funding.

But accountants told the Weekly it's really not clear how musicians should classify this type of money on their tax returns.

In fact, it turns out that Herstand might not even have to pay taxes on his pledges at all.
It all hangs on a philosophical-sounding question: What is a pledge? Is
it a sale? That might depend on the reward — a CD in exchange for a $15
pledge, for instance, might be considered a sale.

Alyce Bonura, of Sherman Oaks-based tax consultants Bonura &
Associates, who has worked as an entertainment-industry accountant for
30 years, doesn't believe that to be the case. If a band is raising
money to make an album, Bonura says, profit from that work is what
counts as income, and that's what the band will be taxed on “after they
deduct their expenses: the album-cover designers, the recording studios.
All that stuff.” The rewards, she argues, could be written off as
promotional costs.

“It is not income,” Bonura says. “It is either an investment, a gift
or a loan,” though it's only a loan if there is a contract outlining the
terms of such an agreement. If it's a gift, you're not required to pay
taxes on it up to $13,000 in value.

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Gregg Wind, a CPA at West L.A.-based Wind & Stern, agrees that it's
debatable whether the money qualifies as a gift or income. “I don't know
if it's clear yet. I would say that it's an evolving area.”

Echo Park-based band LA Font closed a round of Kickstarter funding
last year. One hundred and sixty supporters backed the project, from
friends and fans to music bloggers.

“It gave everyone the chance to say: I'm into this, I've got skin in
the game, I want this to succeed,” member Greg Katz says. “That said,
would we do this again? The answer is probably no.”

They set their goal at $9,000, and pulled in $9,135, but their cut
was smaller. Kickstarter and Amazon each immediately took their 5
percent, leaving the band with $8,222. After that, they had to fulfill
various rewards promised to backers, including posters, vinyl records
and the chance to dictate Katz's facial hair for a week (Exception: no
Hitler mustache). Then there was the shipping materials and the postage.

With the money LA Font had left, they hired a name producer, Eric
Palmquist, and booked some time in an East L.A. studio. A year after the
campaign, they've recorded an album they are proud of. But having used
up the money on studio time, they'll have to fund the few thousand
dollars more it will cost to mix, master and press the album onto vinyl
themselves.

That's OK, though, Katz says. After all, their Kickstarter campaign
was only meant to help them on their way to making a great record — one
that might ultimately land them a deal with a label.