[Chat] When does funding collected through crowdfunding become revenue?

As a preliminary note, I am not advocating for tax evasion, nor am I personally planning to conduct a crowdfunding campaign.

While I was checking the accounting treatment for crowdfunding, I thought, “Doesn’t this mechanism allow for the timing of tax payments to be adjusted?” so I decided to write about it as a casual topic.

Crowdfunding and the timing of revenue recognition

In crowdfunding that involves product rewards, revenue may be recognized not when the funds are received, but when the products are shipped.

In other words, a situation arises where the company already has the funds on hand, but they have not yet been recognized as revenue in the accounting records.

Of course, when revenue is actually recognized depends on the contract terms, the nature of the transaction, and the applicable accounting and tax rules. It is not always the case that revenue is recognized at the time of shipment.

Also, one of the characteristics of crowdfunding is that product releases can be delayed.

It is not uncommon for development and manufacturing to take time, causing the originally planned shipping date to be pushed back.

So, what happens when this combination of “receiving funds in advance” and “providing the product later” occurs?

For example, let’s consider this case:

Suppose a company recorded a loss of 35 million yen in the previous fiscal year.

If that company conducts a crowdfunding campaign and collects nearly 100 million yen in funds, far exceeding the originally planned amount.

If they release the product as planned and recognize the revenue, they might generate a large profit even after deducting other expenses.

If that happens, a corporate tax burden will also arise.

However, regarding the loss from the previous fiscal year, it may be possible to carry it forward and deduct it in subsequent fiscal years if certain requirements are met. Also, how much profit is actually generated depends on product manufacturing costs, development expenses, and so on.

So, what happens if the product release is delayed here?

Suppose that while revenue recognition is pushed to a later date, the company has already secured the funds collected through crowdfunding.

Since the company continues its operations during that time, expenses such as investments in other projects, development costs, and personnel expenses are incurred.

If expenses are incurred in the fiscal year when the revenue is recognized, the profit for that year will be smaller. As a result, the profit and corporate tax burden for each fiscal year may change depending on when the revenue is recognized.

Of course, if you incur expenses, the company’s cash on hand decreases by that amount. Also, a company cannot simply decide the product shipping date or the revenue recognition timing freely.

Even so, I thought that with crowdfunding, where funds can be secured in advance, the gap between the timing of fundraising and the timing of revenue recognition might allow for cash flow management that differs from typical business operations.

Having cash but low profits?

What is interesting here is the point that a company’s cash on hand and its accounting profits do not necessarily match.

Generally, it is thought that if losses continue, a company’s management will become difficult.

However, if a large amount of funds has been secured in advance through crowdfunding, there might be a certain amount of cash remaining on hand even if there is a loss in accounting terms.

Of course, those funds are also necessary for product manufacturing, shipping, and future development. Since there is also an obligation to provide rewards to supporters, the collected funds cannot all be used freely.

Even so, being able to secure a lump sum of cash at the time of fundraising has great significance for continuing the business.

In other words, having low accounting profits and having a shortage of cash on hand are not necessarily the same thing.

And if funds come in first while revenue recognition happens later, wouldn’t the combination with the timing of when expenses occur also affect the burden of corporate tax?

Does this constitute tax evasion?

Despite writing all this, it is not a simple matter where delaying a release will automatically reduce corporate tax.

There are rules for revenue recognition in accounting and tax, and the treatment also differs depending on the form of crowdfunding and the contract details.

Also, how intentionally delaying the timing of revenue recognition is treated for tax purposes needs to be considered based on individual circumstances.

Therefore, I do not mean to argue with this discussion that “you can evade taxes if you use crowdfunding.”

However, if the timing of receiving funds and the timing of recognizing revenue are different, and there is also a range in the product release timing, the question remains as to whether there is room for tax issues to arise there.

Crowdfunding is a convenient mechanism for raising funds to bring products into the world.

On the other hand, the combination of being able to collect funds in advance and having the product provision and revenue recognition happen later has characteristics that differ from general fundraising.

This time, I wrote down as a chat some things that caught my attention while looking into the accounting treatment of crowdfunding.