Crowdfunding for Donations

The term “crowdfunding” has sprung into use; but because there are different forms of crowdfunding, it's not always clear what this new term means. Generally, crowdfunding is raising money from a crowd, usually over the Internet. 

This alert is about one type of crowdfunding: crowdfunding for donations. This is when people ask for money without offering anything in return.

Background and Definition of Crowdfunding

People have always asked others for money—for a sick relative, a charity, or to start a business. In the past, we’d ask family, friends, or coworkers. Now, with social media platforms like Facebook and Twitter, we can ask hundreds of people at once. Our friends can then share our requests to help us reach even more people. This is what crowdfunding is all about.

Crowdfunding is a way for people to come together, usually online, to support a cause or project by pooling their money.

Crowdfunding Platforms

Many websites act as crowdfunding platforms. Popular ones include GoFundMe, IndieGoGo, and Kickstarter. Different platforms focus on different kinds of projects: some raise money for charities. Some raise money for creative projects like movies or books. And some try to fund new products.

People can create their own projects on these platforms and share them on social media to reach potential donors. The platform usually charges a fee between 4% and 20%. Extra fees are charged for credit card processing. Always read the platform’s terms of use before donating or starting a campaign.

Donor Beware

Crowdfunding is another way to ask for money, and just like with any donation, scammers are out there. Be careful before donating. Here are some questions to ask:

• Who are you donating to? Are you sure the person is who they say they are?
• 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 you’re donating to an individual, is it someone you know and trust? Does the amount they’re asking for seem right? It can be hard to know if the money will be used correctly, so trust your gut.
• If using a crowdfunding platform, check the description and organizer. If they claim to be connected to the recipient, verify their identity by searching online or on social media.

Frequently Asked Questions

1. What if I think the money is being used for something else?

If you think donations to an individual are not being used as promised, contact local law enforcement. Donations to individuals are not considered “charitable” under the law and are not subject to regulation under Michigan's Charitable Organizations and Solicitations Act. This Act regulates solicitations for charitable purposes.

If you think a charity is misusing funds, you can report it to the Federal Trade Commission, the Attorney General’s Charitable Trust Section, and the specific crowdfunding platform’s complaints page. If you know what city and state the crowdfunder is in, you may also wish to report your concerns to the local police department for that community.

Under the Charitable Organizations and Solicitations Act, the Charitable Trust Section registers charitable organizations that solicit from the public. 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.

You may contact the Attorney General's Charitable Trust Section at:

Department of Attorney General
Charitable Trust Section
P.O. Box 30214
Lansing, MI 48909
517-335-7571
Fax: 517-241-7074
Email
Charitable Trust Website

2. Can you take a federal tax deduction for donations made through crowdfunding sites?

Maybe. Federal tax rules allow deductions only if donations are made to qualified organizations, usually 501(c)(3) charities, and properly documented. Donations to individuals are not tax-deductible. For more details, see IRS Publication 526 or talk to a tax professional.

3. If you are raising money on a crowdfunding site, do you need to register with the Attorney General?

Probably not. For a donation to be considered “charitable,” it must benefit the public, not an individual, no matter how worthy the cause is. Michigan's Charitable Organizations and Solicitations Act exempts those who raise money for specific individuals from registration and reporting requirements. See MCL 400.283(a). For more info, visit the Attorney General's Charities website.

4. Can you use crowdfunding to raise money for a charity you support?

Yes, but only with the charity's permission. It’s against the law to raise money for a charity without getting written approval first. MCL 400.288(c). Many charities already use crowdfunding platforms, so instead of starting your own page, consider sharing the charity's fundraising page through your social networks. This helps spread the word without needing permission.

5. Are crowdfunding gifts taxable for recipients?

This question goes beyond this alert. However, recipients of crowdfunding gifts should know that these gifts might be taxable under federal or state law. Be sure to talk to a tax professional about this.

For more information on donating through crowdfunding, see the Better Business Bureau's guide, What to Know Before Donating to a Crowdfunding Cause. You can also find useful information on the Federal Trade Commission's website, including how to complete your due diligence before contributing to a crowdfunding campaign.

To file a complaint with the Attorney General, or get additional information, contact:

Consumer Protection Team
P.O. Box 30213
Lansing, MI 48909
517-335-7599
Fax: 517-241-3771
Toll-free: 877-765-8388
Online complaint form