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Kicktaxing: The Crazy Complexity of Paying Tax Correctly On Crowdfunding 128

Posted by Unknown Lamer
from the irs-ruins-everything dept.
eggboard writes "I thought I knew what I was doing when I budgeted for a Kickstarter campaign. I spent weeks sorting out details, set a number ($48,000) that included expenses, Kickstarter fees, and a margin of error. In the end, we raised over $56,000. But my tax planning nearly put a crimp in cash flow, and could have been real problem. It all worked out, but I've written a detailed guide for people for before and after a campaign to avoid my mistakes."
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Kicktaxing: The Crazy Complexity of Paying Tax Correctly On Crowdfunding

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  • WTF - you know, every other small business person thinks of this shit BEFORE they start. It's not hard, really. Quit pretending you're running a lemonade stand in your parents driveway.

    • by TheGavster (774657) on Monday February 17, 2014 @09:37PM (#46272471) Homepage

      I read the article, and he brings up some interesting points that even a business owner might find interesting about crowdfunding. Because your revenues are exponentially larger for a single quarter, your tax situation gets all screwed up and you have to be very careful on your estimated taxes. He also brings up some timing advice: since businesses are allowed to deduct the costs of doing business, you don't want kickstarter to cut your check on December 31st.

      It's really the opposite of most business tax situations. Rather than paying for material, wages, and capital expenditure and then waiting for invoices to come back, you're given a huge amount of revenue and then have to try and get it off the books as fast as possible.

      • Re: (Score:2, Informative)

        by Overzeetop (214511)

        I read the article as well. I also happen to run a business I started ten years ago from scratch. I'm not a business person, and even I knew that taxes mattered. This really is business 101. There are all types of businesses, and 2 hours with an accountant prior to starting any business, much less one in which you know is going to see 5-6 figures of cash flow in a very short period of time, is the first thing you should do. Mine gave me insight into basically everything in the article.

        Yeah, I was an asshol

        • by eggboard (315140) on Tuesday February 18, 2014 @02:23AM (#46273817) Homepage

          I spent many hours and many emails with a good accountant, and he advised me not to launch a Kickstarter late in the year! However, there was no better time, and I had to work around the cash-flow issue, as I describe.

          The state taxation issue was my fault. I had, in fact, budgeted to spend *more* on tax than I actually owed. So I wouldn't have come up short. Based on my communication with the state, I expect that I would pay different rates on parts of the Kickstarter, and potentially pay up to about 5% to the state in tax. In the actual event, it was about 1.5%.

          However, I should have better understand the issue of destination addresses so that I had properly collected that information from everyone. That's something that I've now heard from many other crowdfunding projects about, too.

          Further, at least Washington State requires you pay in-state retail business and occupation tax plus sales tax on all sales for which you cannot account for the destination. That can be a huge tax bill.

          • Good stuff, don't listen to the losers ;)

            Just a random thought

            Has anyone done a Kickstarter in Idaho? I wonder how you would get around the tax issues there.
            "(One more tip: my accountant says that Washington State requires that I inform customers that sales tax will either be included or added to purchases. Kickstarter doesn’t let you automatically surcharge sales tax, which varies by delivery ZIP code, in any case. I chose to include it. Other states may also have this requirement.)"

            You are not allow

      • by eggboard (315140)

        Thanks, TheGavster! For me, I had sufficient cash flow and overall income from the main business relative to the size of the Kickstarter that we could have weathered it if we hadn't had a perfect alignment as we did.

        I don't mean to sound totally hapless. I had put a reserve of cash away for taxes and estimated *too high* for the state taxes as it turned out. But I didn't plan as thoroughly as I should have, and I have seen this bite a lot of other people I know, too.

      • by julesh (229690)

        He also brings up some timing advice: since businesses are allowed to deduct the costs of doing business, you don't want kickstarter to cut your check on December 31st.

        Here in the UK we're allowed to claim expenses in a tax year if they relate to business conducted in that year even if the expense is paid for in a later period (see http://www.hmrc.gov.uk/manuals... [hmrc.gov.uk]). Is this not the case in the US?

        • by julesh (229690)

          He also brings up some timing advice: since businesses are allowed to deduct the costs of doing business, you don't want kickstarter to cut your check on December 31st.

          Here in the UK we're allowed to claim expenses in a tax year if they relate to business conducted in that year even if the expense is paid for in a later period (see http://www.hmrc.gov.uk/manuals... [hmrc.gov.uk]). Is this not the case in the US?

          Plus it's also irrelevant when kickstarter pay you: you pay the tax on the money you receive in the tax bill for the period in which you earn it, which for preorders (which is what kickstarter finance effectively is in most cases) is the period in which the product is dispatched, not the period you receive the money.

    • by The Cat (19816) on Monday February 17, 2014 @10:07PM (#46272685)

      Memorandum to the guy who wrote the original story:

      Almost everyone on Slashdot in 2014 is a raging, gangrene-infected, pus-spewing asshole. I don't think there's ever been a more sour, mouth-running bunch of twaddle-shoveling fucks in the same place in human history.

      You posted a good article with some good information for reasonable people who are doing something productive. The people here are only interested in their bong, porn, Xbox and wandering through their mom's kitchen occasionally to grab a handful of potato salad and wipe their ass on the dishtowel.

      Keep writing. The people around here would shit on an orphan's birthday cake.

      • by eggboard (315140) on Monday February 17, 2014 @11:32PM (#46273135) Homepage

        Thanks, much! Really, I wrote the article in part as a public service, not to be full of myself, because so many people I know have these questions. I have some answers, lots of questions, and lots of places to point people for planning. The commenters here can be awful at times (some are great, thanks!), but they're dwarfed by the number of people who are reading the article.

        • by Dareth (47614)

          As a relative old timer here, let me say I rather enjoyed the article for its great detail and information. You gave what looked to be an honest account of someone with a fair amount of experience doing something new and learning from the experience. Instead of hoarding that knowledge you attempted to share it. Just wanted to let you know it is appreciated. This is exactly the thing I come to Slashdot hoping to find.

    • by pla (258480) on Monday February 17, 2014 @10:45PM (#46272891) Journal
      WTF - you know, every other small business person thinks of this shit BEFORE they start. It's not hard, really. Quit pretending you're running a lemonade stand in your parents driveway.

      Bullshit.

      A lot of the folks running Kickstarters have "business plans" that amount to "distribute sweaters to homeless kittens". Should they realize that has tax implications? Well, perhaps, insofar as you can't fart without the IRS taking a sniff. But to blame people who seriously have a business plan of clothing cats, for not understanding cash-vs-accrual accounting? Seriously, go fuck yourself with your framed MBA, dude.


      We wonder what has gone "wrong" with this country? TFA gives a pretty damned good example. Have a good idea? Have adequate funding? Ready to ship and create one of those new Small Businesses the talking heads always praise? Oops, FOAD friend! You forgot about your quarterly withholding on money that no sane entity would consider anything but a production expense - Silly bear, considering our government "sane"! What will you think of next?


      For anyone seriously wanting to know the "right" answer to this issue - Move to one of America's few remaining unorganized territories (Maine, Florida, and Alaska have a ton of them); that relieves of you 99% of the "bullshit" burden, which rests solely with your most local taxing authority (the city/town/county), and reduces your nightmare to just the state and federal levels. Most states just want a cut of your AGI, so if you have no profit, nothing to report. The feds just want a schedule C and SE, and couldn't care less how else you officially organize your activities.

      Now, if you happen to live in a hellhole like NYC where everyone from the city through your Block Captain to your Landlord to your old roommate from 1976 get to fuck you with taxes - Move, or abandon your dream. Seriously.
      • Huh? Nobody expects small-scale entrepeneurs to understand the tax laws. That's why they need to talk to somebody who does, and find out the consequences in their particular situation.

    • by eggboard (315140)

      It's more like the lottery.

  • ...to get in a man's way.
  • If you use accrual basis you can then (in theory) report the kickstarter funds as deferred revenues and also defer the tax until goods/services are delivered. Only a cash based business would need to pay tax prior.

    • by eggboard (315140)

      I researched this and discussed it with my accountant. My accountant said that switching cash-basis business to accrual for the sole purpose of deferring taxes for something that isn't part of its routine business could be met with scrutiny and penalties —and be disallowed.

      And the IRS rules make it clear that you can't simply align revenue and expenses. It has a number of examples in which it's clear that in a Kickstarter, the revenue couldn't all be deferred, although the expenses might be allowed to

      • I would argue you should have started a new corp just for the kickstarter campaign, the cost is pretty low even if you have someone do the paperwork for you. I think the more important point to be made is planning on many levels is essential.

  • ...Paying Tax Correctly for USA citizens on Crowdfunding

    Fixed that for ya. Remember guys, the internet is WORLDWIDE.
    • Go ahead and try to do business in the US without paying US taxes. Heck, try to be a US-based business or citizen and do business overseas. Either way - the IRS will get it's chunk of flesh from you. Even when no other developed country would consider it proper, Uncle Sam will take his cut.
      • by PPH (736903)

        Microsoft, Apple, Google, IBM, Citigroup, Exxon Mobil, ....

        "Only the little people pay taxes." - L. Helmsley

        • They all pay US income taxes. In 2012:

          Microsoft: $2.4 billion [marketwatch.com]

          Apple: $8.4 billion [marketwatch.com]

          Google: $2.5 billion [marketwatch.com]

          IBM: $1.5 billion [marketwatch.com]

          CItigroup: $229 million [marketwatch.com]

          ExxonMobil: $2.5 billion [marketwatch.com]

          Seems to me that they all pay income taxes - and quite a bit of it. It's a common fallacy that big companies don't pay taxes. Just take a look at the facts for yourself and find out that they do, in fact, pay income taxes - and a lot of them at that.

          • by CastrTroy (595695)
            But looking at Wikipedia, Microsoft had revenues of 77 billion, so only 3% of the money they made went to taxes. I wish it worked that way for me. Oh, they're only taxed on money they don't spend. Their net income was 21.86 billion, again, only paying 10%. Quite a low tax rate if you ask me. not sure why you mentioned Citigroup, with a net income of 13.9 billion, they only paid 1.6% in taxes on net income. All my numbers are from Wikipedia, using your tax numbers.
            • The GP asserted that corporations didn't pay tax. I think we can both agree they did. Now you want to discuss how much they pay; OK, fine. How much should they pay? And how much should the average person pay? Because the vast majority of US citizens pay less than 10% federal income tax [taxfoundation.org]. And it's the bottom 80% who pay that rate; the top 20% tend to pay way above 10%.

              So how much would you want the corporations to pay, since we agree they ARE paying? How much should the average US taxpayer pay? And h

              • Very many people pay more FICA than the more narrowly defined "income" tax, particularly if you include the impact of the deceptively named employer's share. That nullifies a lot of the benefits of the progressiveness of the income tax.

    • by j-beda (85386)

      ...Paying Tax Correctly for USA citizens on Crowdfunding

      Fixed that for ya. Remember guys, the internet is WORLDWIDE.

      The USA manages to stick its tax fingers into a whole lot more than just USA citizens. I suspect that if you use any USA based service (such as Kickstarter or any number of payment systems) you may run afoul of USA tax requirements. Hopefully you won't get hit with a net bill (as there are tax agreements between the USA and a lot of other countries that mostly prevent double taxation), but you can still be hit with non-reporting penalties and the like.

      It is not pretty, and it is not limited to USA citizens

  • Too complex (Score:4, Insightful)

    by asmkm22 (1902712) on Monday February 17, 2014 @10:02PM (#46272649)

    As a small business owner, I can say that the US tax system really needs to be simplified. I started my business 3 years ago, and had to learn the accounting and tax side myself (I couldn't afford a CPA or book keeper at the time). For a nation that claims to be built on small businesses, it sure is crazy trying to figure out what's needed to run start or run one.

    • by ThorGod (456163)

      It's definitely costly to business, and that's one added expense no one (government nor business nor employees) really benefits from having.

    • For a nation that claims to be built on small businesses, it sure is crazy trying to figure out what's needed to run start or run one

      The US Federal tax code now tops 80,000 pages or about 8+ times the length of War and Peace. If you don't think that's nuts then you're probably either a tax attorney or a Washington lobbyist. The politicians like to talk about good paying jobs, but they're killing the very small businesses that might create those jobs with over taxation and regulation. There was a time in the United States when people with a grade school education could start a business and be successful without having to worry about the g

      • Re: (Score:2, Insightful)

        by Anonymous Coward

        Thats because its become a system of kickbacks. Congress doesn't want to raise the corporate tax, so they create newer, more specific ones that hit everyone through sheer quantity. But heres the kicker, Congress also knows that corporations (and its largest owners) are their biggest donors, so they give huge subsidies and write-offs to corporations... that can afford accountants/lawyers smart/able/with enough time to find, understand and file all the necessary paperwork before the deadlines.

      • by AmiMoJo (196126) *

        It's not like you have to read every page though, or at least that is the theory. Only a small part is supposed to apply to a particular small business. My point is that the overall size of the code isn't necessarily the issue.

        We could probably cut it down a lot with a "no bullshit" rule. I bet 75% is trying to close loopholes that people found to dodge tax.

    • by caseih (160668)

      The problem is that every time a politician agrees with you about simplifying the tax code, and tries to do something about it, it just gets more complicated. The only solution is to throw the whole tax code out and start over. But that will never ever happen.

  • by jonsmirl (114798) on Monday February 17, 2014 @11:15PM (#46273069) Homepage

    He got into these problems with revenue matching because he is running his business on cash basis accounting. In general only very small businesses can be run on cash basis accounting almost all manufacturing oriented businesses use accrual accounting. With accrual accounting you would book the Kickstarter money as a customer deposit and then recognize it as income when the product ships.

    http://www.investopedia.com/te... [investopedia.com]

    • by eggboard (315140) on Monday February 17, 2014 @11:24PM (#46273109) Homepage

      Absolutely correct in one regard, but some very large business also run on cash if don't make stuff that's inventoried.

      I did research it (and mention it in the article) and discuss it with my accountant. Because the publication doesn't really qualify for accrual accounting, it would have invited scrutiny (or worse) had I switched to accrual to get advantageous accounting rules for a specific project.

  • Guy ended up with more revenue than he spent, so he had to pay taxes.
    He didn't think to consult an accountant which would have been able to make the balance sheet negative without any issue.

  • There's less than 1.0% chance of getting audited. So just get creative with your return.
  • For many, self-employment tax is another really good reason to try to steady things and avoid "bouncing revenue", if there's the chance that you could end up taking a loss the next year. Big profit one year? Pay big tax! Loss next year? Sorry, bud, no refund!

    I confess to getting first-hand experience with this, as I'm accounting on an accrual basis, and just paid taxes for a rather large amount of work done that may eventually have to be written off as bad debt, or at the least is going to cost me to coll

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