Kickstarter and Taxes
Every year, sometime between flu season and allergy season, everyone’s least favorite holiday arrives on the scene, and I don’t mean Groundhog day; how could you even think that? Any holiday with a movie that good is absolutely worth celebrating!
Of course I mean tax day. Everyone has to do it, but for those who Kickstart, it takes on a whole new significance. Starting a small business (which is basically what a successful Kickstarter does as far as the tax man is concerned) is intimidating but don’t worry, I’m here to help.
Join us below the fold and I will share with you the trials and travails that my partner and I shared on this very topic.
Note: I am not a tax professional, and this is not advice.
Later today I will meet with an accountant to do my taxes. Normally I do them myself with a fancy computer program, but today there are a number of new factors I have never dealt with before. I need to file taxes in two states, deal with investment income (however meager,) and of course, deal with income from Kickstarter.
Now, because we didn’t meet Amazon’s minimum standards for a 1099-K, which is 200 or more pledges AND $20,000 or more raised, no one has told the IRS just how much we did or did not make using crowd funding this year. However, I hear that it’s a pretty bad idea to try to sneak one past those guys, so we will be reporting the full amount owed, as the rest of you successful crowdfunders should.
Last fall when Chris and I were starting up our Kickstarter we made a list and we checked it twice. We designed a good pitch, found the right people, and got the word out. But everyone saw that. We also did other things that were less obvious – we made a budget, got quotes, and most importantly (so far as the tax man is concerned) we created a company, Caffeineforge LLC, to help us come tax time. Not everyone has to create an LLC, I grant you, especially if you are flying solo, but for a variety of reasons we did.
The tax implications of this are pretty simple:
(Money raised – Business Expenses)/(number of parties in the LLC)= Taxable income passed to the owners of the company.
Because the LLC is a partnership, we divide the net income of the company by two. this is then handled in a relativelysimple concept called pass through taxation. This basically means that the net income goes straight to the tax returns of myself and my partner, rather than creating some fictitious entity that is taxed separately. The most important thing to remember about this form of taxation, is that deductions that exceed the profits your business makes do not apply to you other sources of income; your business income can go as high as it wants, but without being a corporation you can only go as low as zero (as I understand it. Remember that bit at the top of the page about me not being a professional?)
If we had the chance to spend all the money raised by the end of the year, we could tell the IRS that our business didn’t earn a dime, but as many readers/backers already know, our production schedule stretches all the way to June, this means that many costs including half of the art budget and all of the printing costs simply won’t help us in 2012. This doesn’t mean they aren’t still valid for next year’s business taxes (provided of course Caffeineforge generates some income to deduct them against.)
At the end of the day what all this means is that we will have earned severa thousand dollars as far as tax law is concerned, and we will be paying the government about a thousand or so dollars we might have avoided through better awareness and planning of the issue.
The easiest way that you can avoid our mistakes of course is to be aware of the issue and plan ahead (hence the point of the article.) Also, hiring a tax professional to keep you out of hot water seems like a really good idea to me as well.
If I have any insights once all the numbers are tallied I will of course relay those to you. Has anyone else had to navigate the maze that is small business taxation? I’m sure I speak for everyone when I say that we would love to hear your story!
Caffeineforge 
David–This is a great post. I wrote about finances on my blog a while back just after meeting with my accountant, and it might help fill in some of the gaps here: http://stonemaiergames.com/2013/01/16/kickstarter-lesson-4-accounting-and-finances/
This was the main takeaway that I didn’t realize before that meeting: “The good news is that you don’t actually have to pay income taxes until you fulfill your pledge promises. On the flip side, the expenses that went towards creating those pledges aren’t deductible until you fulfill your pledge promises.”
If we had been clever enough to incorporate as an accrual account company than we would be in that same boat, sadly I ticked the box next to cash accounting, and so must abide the calendar year.
At least that’s my understanding. Maybe the accountant will prove me wrong.
Normally I’m not an avid reader of Tax information but this may actually be useful for me since I’m trying to get an old friend to turn his long term music project and aspirations into a kickstarter that will help him make it a reality.
If you or your friend have any questions on the subject of crowd funding, I would be glad to try to answer them.
Also, just to be clear, I don’t plan on making a regular tax segment. 🙂
We’re still in the phase of planning and working out some important creative elements. Probably won’t come to fruition for at least 6 months. But once we have things fleshed out and are much more ready to go forward with everything then I will wind up reaching out to you for some input considering you have a lot more experience with this than I do.
I look forward to it. 🙂
Thanks for posting this. It’s hard to find good information on Kickstarter and taxes. Reading your personal experience is useful.
I’m glad you liked it.