Re: Commercial Games - Tax Implications?
Hello,
First, taxes and business types are different for each country, but they follow the same ideas. Here is the U.S.
Aprone, did your accountant tell you you could not deduct cost of goods sold? They are wrong if they said that:
http://blog.fundinggates.com/2014/02/un … ding-cogs/
https://www.irs.gov/publications/p334/ch06.html
You have 2 options:
1. Deduct everything as a business expense (everything but meals and personal expenses)
2. Figure the cost of your inventory and deduct that as you sell it. This means if Aprone got a USB cable for $3, a plastic thing to wrap around your head for $1, a censer for $6 and he used $1 in electricity for each see monkey and he sold the total unit for $15, he could deduct $11. This means only $4 is taxed. Now where life gets fun is deducting storage costs, administrative costs and whatnot from that see monkey.
Pretty much anything that you spend on your business, other than meals, is tax deductible. Meals you can only deduct business meals 50%.
https://www.irs.gov/businesses/small-bu … s-expenses
But taxes are incredibly complex and most CPAs don't understand them all. In fact, the tax document for the U.S. is somewhere around 10000000 words long:
http://taxfoundation.org/blog/federal-t … words-long
There are 3 types of businesses:
LLC, Corporation and sole proprietorship.
http://smallbusiness.chron.com/small-bu … 57845.html
I recommend an LLC or SCorp for a small one person company.
A sole prop is just you working now. Everyone is a sole prop by default. If you have a name like Zwinga for your business and your name is John Doe, you you need to file a doing business as. Aprone needs to file a DBA because Aprone is not his legal name and his company name is Aprone's Games. If Aprone was his legal name, he would not need a DBA. But a sole prop is taxed as an individual and you don't need to do anything but deduct your business expenses.
https://www.sba.gov/starting-business/c … rietorship
An LLC and sole prop are very similar, but an LLC gives the business owner limited liability. This is good if there is any potential of being sued or if the business plans on taking out any loans. You can take out a business lone and if your business can't support that lone, you can file business bankruptcy and you personally are not liable. Just be careful because most banks will want you to sign that you personally will assure the lone. You don't want that if there is any doubt you will not make the payments. Be careful with an LLC though if you ever wish to have partners.
http://smallbusiness.chron.com/small-bu … 57845.html
There are 3 types of corporations, a C Corp, an S Corp and a B Corp.
The two that currently have different tax treatment are C Corps and S Corps.
A corporation has stock, limited liability and different tax treatment. They are made for people who plan on taking in a lots of money, wish to get investors or lots of partners and or who plan on having employees.
They cost about $1500 to get filed with a lawyer and you need to hold board meetings to show you are active. If they are with yourself (You can be the board), you can just say you started your board meeting at 10:30 AM on July 4 2016 and considered business strategy. You wrote out strategy for what would happen if you sold 100 copies of your new game. You ended your board meeting at 12:00 PM.
You also need to have bylaws saying how you treat board members and stock holders.
The power of someone on the board is based on how many stock they own. If someone owns 51% of the stock or more, they are in complete control and have the final say in what the business does.
A C Corp is if you would like to get investors. It has stock and is its own entity. You as the incorporator/primary shareholder can say you want 1000000000000 shares and that is fine. Most businesses like google tend to stay under a billion though.
If you wish an investor, they will say that they will give you $100000 for 20% of your stock. This means that they are now a share holder of your company. Investors also like to be on your board. If you wished, you could give 10% of your stock to grandma and 5 shares to your little brother. You just have to give them a stock certificate and keep track of them in your records.
Just be careful that you don't give up more than 51% of your stock unless you know what you are doing!
The tax difference is that the owner (you) need to pay yourself explicitly. Everyone is an employee of the business. If there is money left in the business account at the end of the year that has not been payed to you, it will be taxed at the corporate rate. If you then wish to pay yourself, it will be taxed again at your tax rate. So if you earned $1000 and it was left in the business account, it would be taxed at the corporate rate of 15% ($15.0). You will then have $850 left in the bank. Then if you don't spend that on business expenses and pay it to yourself, you will then pay income tax for you which is 30%. This means that $850 becomes $595. That $1000 you started with became $595 after taxes!
An S Corp is meant for small business owners like game developers. There can be only 100 shareholders/owners and the tax is passed through to the owners rather than being double taxed.
A B Corp is new and is a benefit corp. If you wish to be a for-profit company but support a cause, a B corp may be good for you. I don't know too much about them as they are too new.
There are very few differences between an LLC and SCorp, but both are meant for small game developers who don't wish to be personally sued.
The differences for one person are that LLCs don't require so much paperwork. The major differences are when there are more than one person running the business or you wish to sell the business.
https://www.entrepreneur.com/article/78034
http://www.bizfilings.com/learn/llc-vs-s-corp.aspx
If this all sounds horribly confusing it is and this is why small business owners have so many problems in the U.S. It normally takes someone going through the school of hard knocks before they really understand even a fraction of what is involved with running their own business. This is where politics comes into play and all I will say is please vote for presidents, senators and governors who will remove income and business tax so all we need is a corporation and sole prop.
Always, always get a lawyer and an accountant if you make more than $10000 in a year from your own business. Other than that you can probably scrape buy with just an accountant, but lawyers are super nice to have.
If you make less than $1000, there are some places that don't require you to file taxes. Check your state.
America is supposed to be the land of freedom and the land of opportunity and look at how much complexity there is to start a business! Just wait until you higher employees...
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