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so kickstarter FAQ mentions the tax considerations (and lack of) for BACKERS, but what about for the person you contributed to

For instance, take a project like OUYA all funds went to Boxer8 Inc. What are the tax consequences on them receiving that money?

I'm mainly curious about the federal government's IRS, don't care about states. "Tax attorneys" can be just as incompetent as random internet advice, so just state what you know and give a credible source for further evaluation.

Do they incur no tax liability? is it ordinary income tax? something else?

clearly getting 8 million dollars for your corporation without tax would be convenient, but I think it is unlikely that this does not incur tax liability

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Of course they incur tax liability. Its pretty simple, actually: according to Kickstarters, projects are required to provide rewards. That means that the funds the projects receive are actually sales.

This allows the project owners treating the project just as any other retail business, but since the rewards are considerably cheaper than the actual project cost, there's enough income to deduct project expenses from. What's left - is your profit and is taxed as an ordinary income on schedules C and SE.

If you don't have any profit intentions, then its a hobby, and there's much less to deduct, but on the other hand the ordinary income doesn't appear on schedule SE (although the regular tax is much higher, so I'd suggest treating it is business).

Credible source: Internal Revenue Code. Closed list of what's not included in taxable income is here. Nothing that can be attributed to the Kickstarter model is there.

By the way, I've already answered this very question on Money@SE. As I mentioned there, timing may affect your tax liability.

This is not a tax advice, see the disclaimer in my bio page. Talk to a EA/CPA for a tax advice.

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ah thanks, yeah I didn't look on that site because I was mainly thinking about it from a registered entity perspective, LLC or Corp. – CQM Aug 19 '12 at 20:58
Always wondered about this. So, you believe that Kickstarter proceeds represent sales revenue, not some kind of equity, loan or contribution? It seems if it were so clear, Kickstarter would say that. Can't the Kickstarter "rewards" represent interest - especially since it's not dependent on profits? If I have a small business and Grandma gives me $5,000 is that revenue? – Patrick Moloney Aug 19 '12 at 21:44
@PatrickMoloney Kickstarter wouldn't say that because they would be held liable if they did. Its not their problem, and they're not tax advisers. It is definitely not interest (since its not a loan), and its not equity (since the contributers aren't shareholders). Its not a contribution because the "contributors" receive consideration in return. If your grandma gives you a gift of 5000 then its not revenue. If you give her a "reward" in return - then it is. – littleadv Aug 19 '12 at 22:00
@PatrickMoloney kickstarter makes it clear that your "pledges" are not equity, or loans and are not tax deductible donations unless your pledge is to a 501(c)3 organization. The only ambiguity comes from the reality that "pledges" has no legal definition for tax purposes. – CQM Aug 20 '12 at 13:13

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