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Kickstarter and the planning process

Posted by riuthamus, 15 January 2013 · 741 views

RuinValor Kickstarter Financial Funding
As the process for making this game legit begins to grind away I have started to become more invested in the financial side of things. With the aid of the internet and guidance from a few close friends I have found out some rather alarming details. One of which eluded my initial thought process.

Everybody goes into the idea of a kickstarter thinking, "I saw this game make $500,000 and that could be me too!". Admittedly I did the same, but nobody ever thinks of the other problems that occur with making such money. If you are from the US ( as most of us are ) you know that in a time where money is short everybody is looking to make something and this is to include the GOV. What does that mean exactly? It means you cant just obtain the kickstarter money without paying the taxes on it.

As of 2011 all money earned from kickstarter is to be reported to the IRS. This means that the second that you start to get the cash from the big success of your kickstarter project you are now being reported to the IRS for making that sum of money. I have read on several locations and now am in conversation with a CPA about the duties of somebody who earns money from such an entitlement. From what I have gathered the following information is true: ( one thing to note is that I am in no way giving you legal advice, as I am not a trained person... these are just things to think of and ask the CPA you speak with. )
  • You should and will be expect to pay taxes on the funds earned
  • There are tax exemptions and deductions that you can use to reduce the overall taxes paid
  • In some cases, depending if you have the right setup you can avoid them all together ( 501 filing of some type )
  • Wording in several locations suggest that the way you present the reward tiers can drastically reduce or increase your chance for tax exemptions
  • If you know nothing of financials you should look at hiring a CPA or at the very least get some quick advice from one
  • If all of the money earned goes to paying for things for the company ( not used for personal profit ) you can likely avoid all taxes together since it can later be claimed as a tax deduction
  • You should setup a separate bank account for your business. Not only for easy tracking purposes but it can aid in the process for separating your tax returns.
I was suprised that these things were not directly states on the Amazon or Kickstarter website. Both of which more or less said "figure it out yourself, but this is a requirement now". So, I started to run some numbers to see what exactly the earnings would be in these scenarios.

Assume I had four people working for me and the 5th employee would be the companies account. If our company earned 250,000 from the kickstarter project the following would be the payments sent out to each party:

Total Earned: 250,000
Before Taxes:
  • Kickstarter: $12,500 ( 5% of total )
  • Amazon: $12,500 ( 5% total )
  • Employee 1: $90,000 ( 40% )
  • Employee 2: $22,500 ( 10% )
  • Employee 3: $45,000 ( 20% )
  • Employee 4: $11,250 ( 5% )
  • Company Cut: $56,250 ( 25% )
This means that each person who is being paid from the funds would need to pay taxes on those funds being earned. Amazong and Kickstarter will pay those taxes on their own end ( from what I have learned so far ) but you are expected to pay the other portions associated with all employees. This means, depending on the state your LLC is derived from, you will need to pay another form of taxes on top of the final income earned.

Most people do not think of this when they are calculating the needs for their company. They barley have the mindset to see past the $$$$ that they can earn from doing a kickstarter ( and i was one of those people till i started to do my homework on it ). So, I wanted to share this blog and hope that people would see it and possibly understand the process in a new light. If you have any questions feel free to post them and as I learn new things ( I am in talks with a CPA now ) I will post what I learn so as to spread the wealth of information.




I read a sort of post-mortem awhile back detailing one group's successful Kickstarter, and what I took away from it is that you also need to be very careful how you structure your reward tiers, and be aware of the costs that can be involved. This group's tiers were heavily physical: lots of merchandise items (T-shirts, mouse pads, figurines, etc...) and in the end the cost of paying out the tier rewards consumed a very high percentage of the total profit because they did not correctly account for their costs. So... yeah, watch out for that.

 

Thanks for this information. I think it's good to see more actual data and hard facts about Kickstarter and other crowd-funding operations, since as you imply a lot of people tend to be blinded by the dollar signs ("OMG it's teh free moniez!") and fail to think about the practical realities.

Not a problem. I have never dealt with these type of concerns and being the only business minded person on our team it would seem I have much to brush up on. In the past 24 hours I have learned so much about the process that it is unbelievable and I figured I would share what I could. After I speak with the CPA guy a bit more and gather some hard evidence on certain tax concerns I will share those as well. Thanks for the kind words and I certainly hope this helps to some wide eyed developers. :)

If all of the money earned goes to paying for things for the company ( not used for personal profit ) you can likely avoid all taxes together since it can later be claimed as a tax deduction

I don't know the tax system in the USA (living in germany), but I think that there are parallels. Just want to note, that even if you don't pay company taxes for paying an employee, the employee still need to pay his personal taxes (income). If you would pay someone money (e.g. the owner), you would pay taxes 2x, the company taxes for profit and the owner need to pay taxes for his income.

After speaking with the CPA, he pretty much told me that he could void out all of the cost of taxes using some deductions that are applicable to game development. I have not paid the man yet since I intend to investigate this personally but if what he says proves correct I will share that information here.

Please do! Well, I'm in Canada so it might not be 100% the same for me. smile.png

I can ask him if that information works for you as well. Im pretty sure some of it could be relevant.

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