Kickstarting and Taxes

I think it boils down to whether people are buying a product or investing in a project and receiving a thank you gift.

I ran a successful Kickstarter a while back and didn't worry about state sales tax. The IRS is going to see it all as taxable income, and you'll have to claim your business expenses to only pay taxes on the profits. (But you probably already know that.)

All that to say, I've never seen a KS do sales tax.

As a legally registered business you don't need to pay taxes in the year that the funds were obtained (KS completion). That money is considered debt until you can produce and ship the games to customers. Once this occurs the income becomes taxable as a registered business (normal income tax).

This has nothing to do with sales taxes as your original question (OP) but I wanted to just put this out there so you know unlike individuals who have to pay taxes in the year they earn the income, businesses can differ payment of taxes until sales have been completed.

You won't actually "charge" WA sales tax on games sold to WA backers (unless you add a specific pledge level for WA residents), but you will be responsible for paying the tax on those specific games.

Games sent to kickstarter backers in other jurisdictions (ie: outside of the state your company is registered in) are not subject to local taxes.

No, the contributions are considered revenue or assessable income and you are taxed on profit or taxable income. This means you deduct expenses incurred in generating that profit (ie printing the game and postage) to get from assessable income to taxable income, as has already been stated. You will not in your example pay $2000 in tax on a $10,000 kickstarter for this reason.

Are you're suggesting he register his small business as a legal corporation for tax purposes when he could just register the business and pay tax on its profits as income as an individual?

What income are you presuming he will earn for him to be paying 20% of his entire income?

I believe that Kickstarter takes 5%, not 10%.

I'm coming from a diploma in accounting.

I agree with THAT ^^^.

The larger your fanbase, the greater the odds for "re-occurring" success. Take a small step, earn 250 Backers and then help grow that to 5x the number or 1,000 backers. Not in two (2) steps - but maybe three (3) steps.

I strongly doubt that you'll go from 250 -> 1,000. You might go 250, 500 and then 1,000. If you can produce quality games people want to play.

This has been the route that all the successful KS Entrepreneurs have each done. Start with one game, make some money + gain some backers and then grow that fanbase for the next game.

But generally speaking if you HAD a crowd of 5,000 backers, you could easily market games to them and probably sell your published game from different authors. I think it's a false conclusion to say that every game will be from the original author.

No it's a progression (for some). You start off with your own game ideas and then sell through those and then try to get games from other designers and become a "web-publisher" that KS games for other designers.

Something like that... Just my 2 cents.

Basically there are PROFITS which are TAXABLE as EARNINGS and then there are EXPENSES which you deduct from the total amount to determine the amount of PROFITS.

So IF your Kickstarter earns $20,000 and it costs you $15,000 to produce it (Artwork, Graphic Design, Manufacturing and Shipping costs), your TAXABLE profit is only $5,000.

And therefore once you ship out your games, the amount LEFT OVER is the taxable amount. Not the GROSS amount, the NET amount.

And as we all know if you pay 20% of $5,000 well that's $1,000. But as a company you may have LOSSES that can offset the payment of profit. And therefore produce a NET Balance of $0...

As an individual, you can't have "debt" (in the income sense). Therefore you are TAXED on earnings in the year that your get them. So as my accountant explained to me, an individual collect $20,000 in earnings in 2016, has to pay taxes on that amount IF he doesn't pay for EXPENSES in that same year. It's considered TAXABLE INCOME. And it cannot be deferred like a company.

You may deduct EXPENSES if you have them in the same YEAR. But at the end of the year, whatever amount you are left over is considered TAXABLE...

@Black_cockatoo

yes of course there is a lot of freedom about the deduction of taxes in germany. but this does not change my initial post and why i posted that. and, in order to deduct from taxes, you first must pay taxes - and in order to pay taxes, you must do something similar to a "sale" in order to have a taxable earning.

I took my time to research and write down all the stuff once more.

super short summary of the financial side of a KS:

European Tax regulations for a KS (Im NOT from the US!)

1. Do i have to pay taxes for a KS (just for the KS)? - YES
2. Do I need a taxable business to run a KS? - YES
3. Is money gained via KS that is used to make a product a free gift? - NO
4. what is reward based KS, is it a gift? - NO, a legal buying contract

http://www.ikosom.de/2014/02/08/welche-steuern-muss-ich-beim-crowdfundin...

the blogger repeats what I said, you got to pay taxes on the amount you "earned (!)" via a kickstarter because its a kind of buying contract. you do not get anything free via KS.

and the rest:

http://www.existenzgruender.de/SharedDocs/BMWi-Expertenforum/Steuern/Fin...

http://forum.golem.de/kommentare/wirtschaft/crowdfunding-kickstarter-unt...

http://rechtsanwalt-schwenke.de/crowdfunding-kickstarter-und-co-rechtsbe...

http://www.mediafon.net/meldung_volltext.php3?id=53d664718de08&akt=news_...

http://www.ebit4u.com/wp-content/uploads/2014/07/Steuern-und-Crowdfundin...

@Black_Cockatoo

yes, you can reduce the amount - there are various ways, but this does not change the fact that the money you gain via KS is taxable (at least here). not the products shipped or anything else.

In addition, raising money via KS without a taxable business brings you right into jail over here.

@all

Why did I bring this argument into the discussion at all? Why did i say "its not about gaining money anymore?". Look at this example:

Say you have a KS under german law running with a 10.000 Euro target. Thats what you need to get your game produced.

you hit 10,000 and after the KS fees and handling fees (which total up to about 9% - its 5% plus 3-5% transaction fee) you receive 9.100 EUR.

Now, you have to pay 19% taxes (here in germany/europe) so this reduces the actual money you gain 7647,06 EUR. which is a lot less than 10.000.

now, if you aimed for 10K and calculated your production cost with that, you are horribly wrong. (I do not say that Questccg or Black_Cockatoo or any other reader on here does that, this is more a general assumption).

You also have to keep in mind that the marketing you put into the KS must be paid, also the production of your game AND the shipping, especially world wide shipping. there are many little costs that add up to your total and eat away your budget.

so after all, the money gained via KS is not as much as it seems. If you do it right, it can finance your initial print run. if you do it wrong, its not even enough to cover your costs.

so the actual worth of a KS lies in the fans and buyers who form a initial fanbase to you, your product and your brand. thats the true purpose of KS in my eyes, nowadays.

its a crowd-marketing platform, not a crowd-funding platform

with board-games, that rarely sell more than 1.000 copies there is one other aspect: it helps you sell your complete initial print-run in one go, if you do it right. so it takes a lot of the risk out of selling each copy inidividually and have the rest sitting on the shelf in the backroom of a small hobby store somewhere out in the country.

and one more final bit of info:

http://de.ign.com/star-command-145286-android/79528/news/was-passiert-wi...

the funding of "Star Command" raised 36.967 US dollars, after deducting all taxes, fees and production costs, the cost of marketing and eyerthing else. they where left with 4.000 US dollars to pay their own salary. which is (divided by the number of people) way below the official salary.

marketing tool? yes

free money? hell, no!

cheers
-Tobias (Fhiz)