Accounting Best Practices for a Small Crowdfunding Campaign
Crowdfunding campaigns are used by nonprofits and individuals alike to raise money to support their missions, start businesses, or support others in need. Chances are, you’ve either hosted or donated to one of these campaigns before.
But when it comes to the accounting associated with hosting a crowdfunding campaign (even a small one), it’s important to remember that there are three types of crowdfunding campaigns and each requires different accounting practices. These different types include:
- Rewards-based campaigns, which provide a reward for the campaign’s supporters, whether that reward is a gift, experience, or tangible product.
- Equity-based crowdfunding, which is a subset of a reward-based campaign in which the host of the campaign sells equity in a company in exchange for monetary contributions.
- Donation-based crowdfunding campaigns, which are entirely reliant on donors giving gifts without strings attached or for any type of tangible or intangible gift.
In this article, we’ll focus on donation-based crowdfunding. It’s the type of campaign that nonprofits like yours most often use to raise money for specific projects that will help them support their missions. Let’s get started with five tips to remember when accounting for a small crowdfunding campaign.
1. Determine how crowdfunding fits into your budget.
Nonprofits create an annual budget, outlining the various revenue streams and anticipated expenses they’ll encounter throughout the fiscal year. Your crowdfunding campaign should fit seamlessly into this budget.
Jitasa’s nonprofit budgeting guide explains that all effective budgets clearly define the activities associated with each line item. This means if your organization wants to use $10,000 to purchase holiday gifts for children in need, that should be noted in the budget. Similarly, you should know which campaigns are bringing in revenue for your organization and what that revenue will support. At the end of the day, your budget will look something like this:
When hosting a crowdfunding campaign, you’ll set a target amount for how much you’d like to raise. This goal should line up with the line item in your budget that you’re trying to fund.
For example, a nonprofit is trying to raise funds to buy school supplies for 50 kids. If it costs $100 for each child, that means the goal of the campaign will be to raise $5,000. Organizations confident that they can reach this goal in a crowdfunding campaign will set their target amount to $5,000. Those who aren’t may ask for a major contribution from another supporter to supplement their crowdfunding goal, bringing the campaign’s fundraising target down to $3,000 or even $1,000.
Clearly noting how your crowdfunding campaign fits into your budget will help your organization:
- Determine an appropriate target amount for the campaign.
- Supplement the campaign revenue if necessary to achieve the goal.
- Organize your anticipated revenue, allocating other revenue sources for other programs and operations at your organization.
When creating your budget, you need to be realistic about how much you expect to raise during the campaign. If you’re hosting a small campaign for the first time, you shouldn’t set an ambitious goal to raise $100,000. This will demotivate your supporters and staff. However, if you underestimate your campaign’s fundraising capabilities, you won’t maximize your earning potential. Strike the proper balance between realism and ambition when you set your budget and determine your fundraising goals.
2. Record your donations in your accounting system.
After your campaign ends, your organization will need to deposit the funds into your bank account and record them in your accounting system. If you use a fund accounting software system, this process is very straightforward.
The software will prompt you to organize the funds you’re depositing and categorize them appropriately. However, you’ll need to double-check that funds are categorized appropriately and that your system is correct on a regular basis.
Incorrect systems of accounting can lead to inaccurate reports and poor financial management decisions. Therefore, double-check the classifications under which your crowdfunding campaign revenue enters your system in your chart of accounts.
Your chart of accounts will have a section dedicated to the contributions you receive, which looks something like this:
- 4000 – individual contributions
- 4100 – corporate contributions
- 4200 – legacies and bequests
- 4300 – federal grants
- 4400 – state grants
- 4600 – local government grants
- 4700 – in-kind contributions
Because you’ll primarily receive donations from individuals during your crowdfunding campaign, the funding will likely be reported under the 4000 – individual contributions. Double-check that you enter the right amount, the details of the campaign, and other important information when you record the contributions made to the campaign.
3. Consider state registrations.
Many states require nonprofits to not only register with the federal government—obtaining their 501(C)(3) status—but also to register with the state to solicit donations. According to Labyrinth’s state filing requirements guide, failing to register with a state can result in late fees and sometimes even civil or criminal charges. Therefore, your organization needs to be sure you’ve maintained compliance with all necessary state regulations and requirements.
Generally, you’ll need to register in the state (if required) in which your organization raises money for your crowdfunding campaign.
Keep in mind that crowdfunding campaigns often attract supporters from across state lines. Therefore, you’ll need to double-check other state registration requirements as well before hosting your campaign.
4. Keep any crowdfunding platform fees in mind.
Earlier, we mentioned the importance of setting a realistic and effective goal for your nonprofit’s crowdfunding campaign based on the funding you need to achieve a program objective. When setting this goal, you’ll also need to account for any crowdfunding platform fees that you will encounter.
This allows you to estimate your campaign’s ROI and ensure your total take-home revenue will cover the project that you’re trying to fund.
For example, let’s say you need $5,000 from your campaign to purchase textbooks that children in your community need for the upcoming school year. However, the platform fee for your crowdfunding campaign is 4% + $0.30 per transaction, which means you’ll need to account for the $200 after the campaign ends.
There are steps you can take to offset this expense:
- Calculate your expected platform and processing fees and increase your target amount to cover that expense.
- Invest in a platform that gives your donors the option to cover the payment processing fees when they donate.
- Educate your donors on the role that payment processing fees play in allowing them to securely give to your cause online.
Keeping fees in mind from the beginning will allow you to set an accurate target and avoid the awkward situation of meeting your goal, yet not having the money necessary to fund your project. When you reach out to your donors after the campaign to say thank you, you’ll want to report that you’ve made progress on the activity they helped fund. Make sure this is possible by accounting for the cost of your fundraising platform when determining your goals.
5. Remember that your supporters may receive tax deductions.
When donors give to nonprofits, they have the opportunity to receive a tax deduction for that contribution. Usually, these deductions are only available to those who itemize their taxes and don’t take the standard deduction. However, during the COVID-19 pandemic, it became apparent that this isn’t always the case.
When The Cares Act was first passed, it included information that would greatly impact nonprofit operations and tax requirements for deductions. For instance, it allowed individuals taking the standard deduction to also receive an above-the-line deduction of up to $300 for their donations made to nonprofit organizations.
You never know who will be itemizing their taxes. And even so, there may be people in your donor pool taking advantage of programs like the above-the-line deduction. Therefore, the best solution is to provide the tax information that any donor would need in order to receive this deduction.
This means your follow-up after the donation should include necessary tax receipt components, including:
- The name of your organization
- A statement that your nonprofit is a 501(C)(3) organization
- The name of the donor
- Date of the donation
- Amount of the cash donation
- A statement that no goods or services were exchanged in return for the donation (if applicable)
Your campaign should make it easy for donors to give and receive what they need after they’ve contributed. Optimize your crowdfunding pages to make it easy for them to go through the giving process, then automate receipts so your supporters receive the recognition they deserve after donating.
Whether you’re hosting your first crowdfunding campaign or your hundredth, you’ll need to make sure your plans are well thought out and that you’ve considered all necessary accounting requirements. Be sure you’ve set a fundraising objective to achieve your goals and are ready to record all important contributions for both your organization and your donors. Happy fundraising!
About the Author
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.