Crowdfunding... and taxes?
Crowdfunding Tax Pre-Sale Donations Investment
I don't know how it's currently being handled. Probably the way it's been suggested by the posters.
I'm not in the US, nor am I familiar with their tax laws, but I am familiar with the one's in my country and Taxation Theory in general. I would like to develop further on the concept; since my soon-to-be accountant mind can't stop guessing about it:
The problem with crowdfunding, as I addressed previously in another post, is that it's not well defined what it actually is. And hence, it's hard to tell how it should be taxed.
It looks like a pre-sale on most aspects, except that if the project isn't delivered, the money is lost; which is why it also shares some aspects with an investment, because backers take a risk. Or it could be seen as a simple donation.
Note: When I speak about "some laws" I'm referring to "laws in different countries".
Is it a pre-sale?
If it's a presale, then the company is owing something. In accountancy terms, that money doesn't constitute accrued revenues yet.
Some tax laws impose the obligation to pay the tax the moment the money enters the company's pocket, but most of the time, the obligation comes when the revenue becomes accrued.
This means the tax will be paid the moment the game is sold (or when the project gets cancelled, unless the money could somehow be handed back to their backers. Although this would bankrupt any start up company)
Is it a donation?
If it is, then the moment to pay is when the money enter's the company's pockets unless it's a non-profit organization. Seemingly easy case.
Except when the company then "gives away" their game to their backers, it constitutes a donation (which is actually a delievery of what's been promised), this time from the company to the backers.
The thing is, some laws prevent or impose limits to substracting donations from their Gross profit, resulting in higher gross profit(*). Therefore such "donation" is taxed again. This constitutes double-taxation, so proper care must be taken to explain your local Country's IRS of the situation.
Another approach to the double-taxation problem is that it's not a donation at all, but rather a necessary cost to sustain the Source of Earnings, therefore the limits to substract donations from net sales don't apply.
(*) I simplified it since most of the readers aren't tax experts. Donations are actually substracted from gross profit, resulting in higher net income. Doesn't really change the point of the discussion.
Is it an investement?
A long discussed argument. I won't go into why it is, and why it is not.
But if it is, then investments aren't taxed. The moment the investors pay their revenues varies wildly per country. Normally, variations include:
- Investors pay their taxes when they receive their dividends.
- Investors pay their taxes when the distribution of dividends has been decided.
- Investors don't pay, because the Company already paid for them.
- The company is not allowed to substract dividends from their Gross profit, resulting in higher Net income. Paying a tax on the dividends would be double-taxation, so nothing is done.
- The company is allowed to substract dividends from their Gross profit. The tax is separately paid by the company either when the dividends have been approved or when the investors actually receive the money.
- There are also hybrid models (investors pay a portion of the tax, the company pays the other part)
- If the final game is worth more than the ammount the backer "invested", that difference is a taxable result. Thing is, unless some law says otherwise (i.e. for the sake of simplicity), it is the backer the one who should pay the tax, not the company! It should be noted though, the company ought to be able to deduce that difference from their gross profit (see donations above); in which case the total ammount the Government receives is cancelled. As a result, tax laws should consider not to pay in this case; as it doesn't make sense to spend effort on this. But unless there's a law allowing it, it is the backer who ought to pay the tax.
- If the final game is worth less than the ammount the backer "invested", that difference is also a taxable result! The company received more money than it should and must pay taxes for that. As for the backer, unless he makes game for a living (the backer is either another game company or an indie developer), he probably can't substract that donation (depends on the each law). This difference is a taxable result.
My personal opinion, crowdfunding resembles a lot like pre-sales, and should be taxed as such. The alternatives are way too complex; while the pre-sale method of handling taxes is widely used and well understood. Furthermore it is the most fair and provides incentives for start up companies, since tax payment is delayed until the game is produced & released, allowing a company to use funds obtained from crowdfunding with more freedom; provided there's an exception for start ups in case they fail to deliver the project.
Well, this ended up being longer than expected, but I think I fully covered the issue. Hopefully we'll start seeing some more serious debate about it.
I'm hoping to see some feedback, as well as some of you sharing your stories or your a view from your Country's legislation in the comments.
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This is a reprint from my dev. blog: http://distantsoulsd...-and-taxes.html