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dpadam450

Tax Deductions

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If anyone has actual experience with this let me know. I'm spending some of my personal income from my day job into my game company on the side, paying artists. Since those business expenses bring my adjusted income down, I will be paying a lot less in taxes. The payroll company we use at work said they can't just reduce the amount of taxes taken out of each paycheck. I'm wondering if there is any way around this. Otherwise I'm just going to overpay $600/month and have to wait till the end of the year to get that money back.

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You really need to consult your own tax professional now, and should have done so before paying anyone out of your own pocket. I would imagine that--depending on the formal structure of your company (e.g. DBA, sole proprietorship, partnership, LLC, or Corp) or lack thereof--how you put money into the "company" from your own pocket can have wildly different tax implications, just as how you take money *out* of your company has wildly different tax implications. For both you as an individual, and for your company.

 

In particular, I'm 95% certain that putting your personal wages into a "company" wouldn't adjust your income unless, potentially, it was somehow structured as an investment. I certainly would not expect for your employer to adjust for it.

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Yea I have an accountant but I figured maybe someone knew.

 

"it was somehow structured as an investment." The minute you decide to spend money as a non-hobby rule, you are a business. Registering as an LLC just adds an extra layer.

 

"I certainly would not expect for your employer to adjust for it." Right, we go through a payroll company and I was hoping they would allow me to manipulate that at my own doing. They decided one check to accidently not deduct taxes and I corrected them, so they can definitely control what money goes where. So far I'm not seeing any way other than to over pay on my taxes for a while, which sucks.

Edited by dpadam450

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What kind of business are you registered as? Your second post, above, makes it sound like you're not?

If anyone has actual experience with this let me know. I'm spending some of my personal income from my day job into my game company on the side, paying artists. Since those business expenses bring my adjusted income down, I will be paying a lot less in taxes.

 The US might be different, but that's really not how it works here.
 
When you get a regular paycheque from your day job, that's personal income paid from a company to you, an individual. On your individual tax return, this counts as income.
When you spend that money on expenses for a different business, it cannot be deducted from your personal income tax...
 
If your own games business is an LLC/etc, then it's a completely separate entity to you, so you certainly can't do what you want to here. When you spend your personal money on that LLC's business expenses, then you're actually loaning your money to the LLC, who then spends it. So... you get paid, and then decide to loan out your pay, which is not a valid personal expense that you can claim on tax, and meanwhile, the LLC receives a loan and spends it, which makes it tax neutral (its expenses match its income perfectly).
 
If your own games business is a sole proprietorship, then you'd be closer to being able to do this, as your finances and the company's finances are mixed together... however, there's still distinctions. When you work a regular day-job, they're paying you-the-person, not you-the-business -- so only work expenses that are justified by you-the-person can be deducted from that income (e.g. if your day-job requires you to buy a phone, etc).

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http://www.nolo.com/legal-encyclopedia/how-deduct-business-losses-net-operating-losses.html

I am an LLC and that is definitely how you do it here. My accountant has said so as well as the link provided.

 

If you spend $2,000, then your business lost $2,000 for the year. If your company gains a profit in 2016, it gets taxed. If it loses money in 2017, you can actually get money back (if you have other income, it just changes your adjusted gross. If I have no source of income (IE I quit my job and go full indie) then I just get money back that I paid for taxes last year.)

 

To clarify: a sole proprietorship and LLC in the US are the same exact thing. The difference being that if you are sued, an LLC registration allows your person assets protection from being lost. There is no registration for a sole proprietorship, you become one the minute you sell something for a profit, unless you are doing this as a 'hobby', which is a weird line that I'm definitely not, simply because I'm spending thousands on expenses + I already registered as a legit LLC, so I'm good.

What you are talking about as a loan, is actually if you are a corporation, which is a completely different entity, and yes would not be pass through. LLC and Sole P. are non-distinguishable from yourself. Registering as a corporation is a whole different thing with taxes and is nice if you are making millions and investing millions back into the company the businesses income is taxed much less. It is something I have talked about with an accountant face to face as well, just doesn't make sense to do unless you have a company making tons of money. You would definitely loan the corporation though if your corporation needs to spend money and has none, you are correct on that
 

As for the UK: http://taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/United-Kingdom-Individual-Deductions
This says you can do exactly the same in America, under the term Loses on this page. I would definitely talk to an accountant to there. If you are a business there (which I thought maybe you were), then definitely look into it. It sounds like the same system.

 

Basically, running ALL my taxes for the year and making a budget, I said I wanted to spend about $1,000/month to start with. My personal tax bracket is about 37% on any income I make. So for instance, I can spend $1,600/month, which reduces my monthly income by $1,600, and reduces my taxes by $592. So my net loss is actually only $1,000.
IE, I can spend 1600 a month, and it will only look like a 1000 loss to me because of the tax reduction. This is where my question comes from, because right now I'm spending 1600, but my taxes aren't adjusted by 592. So I will be spending 592 extra in taxes each month, and have to wait till the end of the year to get that back (7,104 I'm basically loaning the government until they give it back to me at end of year).

Edited by dpadam450

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Your first post and the post above don't quite seem to align with each other.

It appears you are focused on the US tax system. I'm not an account, but I've got accountant family members and have done accounting on my own small business when I had one...

This type of business has the transactions reported on your personal taxes. Typically the businesses file Schedule C and Schedule SE. These forms include some of the business expenses as tax deductible costs. You include those in the tables to calculate your business profit or loss.

Your business should show a profit at least three years out of five. Additionally you are not supposed to take the deduction unless you truly are running it as a business and the business has a loss; if it is a hobby and that shows up in an IRS audit, it triggers all kinds of bad things. Take the business deductions when you aren't supposed to and you have fines, must repay the taxes, and are forbidden from taking the deductions for several years (even if you really do start a successful business).

Be careful that your business is actually a business before you start reporting a business loss. Google finds all kinds of links to help work through that distinction. It is a subjective test and consequently a gray area, but it should be pretty clear if it is a business -- something you invest your life in with the hopes it turns out -- versus a hobby -- something you do occasionally on nights and weekends for fun or pastime and don't invest the time or resources necessary to make it truly become a successful business.

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http://www.nolo.com/legal-encyclopedia/how-deduct-business-losses-net-operating-losses.html I am an LLC and that is definitely how you do it here. My accountant has said so as well as the link provided.

If, like most small business owners, you’re a sole proprietor, you may deduct any loss your business incurs from your other income for the year—for example, income from a job, investment income, or your spouse’s income (if you file a joint return). If your business is operated as an LLC, S corporation, or partnership, your share of the business’s losses are passed through the business to your individual return and deducted from your other personal income in the same way as a sole proprietor.

 

Oh, that would be a handy thing to have. So I guess you can do this in the US :D If your payroll people don't want to adjust their withholding rate, you probably can't force them to though :(

 

BTW that UK page doesn't make it clear whether they can do this or not. They mention the difference between self-employed people and employed people -- this is the distinction I was getting at for my local (Australian) situation. It's rare for someone to be both at the same time, but AFAIK, the two income streams (and one loss stream) would be treated differently.

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@hodgman

Oh, for some reason I though you were in the UK. I clicked your profile a long time ago.

 

@frob

"Your business should show a profit at least three years out of five." This is strictly if you are a non-registered sole-proprietorship. That is a part of the hobby-rule/sole proprietor. IE you haven't registered as a company, which my accountant was clear on. An LLC can show losses forever, you can do whatever you want. Even if I wasn't an LLC, it's pretty clear it isn't a hobby (if I never registered, even though it is still looking legit, yes I would still have to show a profit 2 out of 5 years), but the LLC registration plus the fact I have registered 2 trademarks, etc. ... I mean it is a legitimate business no matter what. I'm not a 16 year old modder. It is my business, I've done the homework, and I hope to go full time at it in the next 2 years. I'm definitely putting in 40 hours a week on top of my 40 hours at work, so I'm trying to make it happen.

Edited by dpadam450

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I'm not so sure about a few of those points, particularly on showing losses "forever", but it seems you're in touch with tax professionals who looked at your details. They should probably be the one you ask there questions to, rather than the Internet at large.

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Well, I think they could technically audit me in 5 years if I don't make a profit even as an LLC. As long as I'm viewed as a legit business/ can prove that I am, then there really isn't much to worry about. If I write off graphics cards and laptops and stupid items saying I need them when they are personal, then yea. But 98% of my expenses are for contractor labor. I can tell you there is a guy on here name Dan Green (radioactive software) that has had an LLC for like 10 years, and I don't believe he ever made a profit on his games.

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The answer to my original question was that I should increase my allowances on my W4. Being single though I can either claim 0 or 1 allowance. So I'll have to see if that 1 allowance will adjust my taxes according to better hit my estimated payments.

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