2016-05-02 22:12:54

Hey everyone,

Obviously I'm not looking for official financial advice here. Now, with that qualification out of the way, I'm interested to hear from those of you who have released commercial games, especially in the US. What have your experiences been like, navigating the murky waters of income taxes, in regards to your games' profits? Have any of you had to deal with game profits posing a problem with any income derived through SSI/SSDI? Any experience filing as a business or LLC versus just a hobbyist? I'm just curious, as this is something we don't discuss much, but is certainly something all commercial developers must have run into. Looking forward to hearing your horror stories!

2016-05-02 23:27:39

Joseph, my experiences won't necessarily match those of others, but I'll share what I can.  My experiences apply to the USA only, and I have no idea what differences there would be in other countries.  I myself live in Michigan, but I've heard that other states are either identical or extremely similar so this should still be useful.

I'll use the word "you", when I'm actually writing this generically for anyone who wants to know.
When you decide to set up an LLC for your personal business, find the website for your state's "Department of licensing and regulatory affairs bureau of commercial services".  There will be a form you use when forming a new LLC, and you send in the filled out form along with, I believe $40.  The initial set-up costs $40 and each year you are billed $25 to renew everything.  The form will ask for the name you want to use for the company (must end in L.L.C.), and to describe the "purpose" of the company.  If you only plan to produce computer games, then that's all you'd need to write.  I included a few extra things, such as selling custom computer devices, so that I would be free to sell any custom hardware devices as well.  Each new thing you add here has to be approved, so that's what prevents people from just listing a ton of crap they're unlikely to ever actually do.  I sadly forgot to include selling card and board games, so one of these days I'm going to have to spend money and send in forms to add those things to my company's "purpose".  So don't add too much more than you need, but also don't screw up like me and forget stuff you will do!  big_smile

Somewhere on the site you apply for an "EIN", which I think stands for employer identification number.  The number they assign your new business will be required on future forms.

Your very first year of making money with your new business is pretty straight forward.  Keep records of what money you made separate from money you have coming in from things that are not your new business.  When it comes time to do your taxes, they'll want all business related stuff separate from other jobs and income.

When you file your taxes I am going to assume you'll go and have them done by a tax professional.  H & R block, or whatever.  I used to do my own taxes but not since starting my LLC, so I can't specifically explain how to do that stuff yourself.  The money your business makes in the first year is almost certainly non-taxed income.  You wouldn't have had anything special in place to get taxes removed from your earnings... don't worry, not a problem!  There is normally only a problem if you Should have had over $1000 in taxes taken out.  The United states government gives people a 1-time pass for their first year of going over that $1000 mark.  You'll still have to pay it, of course, but there are no fees.  From that point on if your taxes ever owe more than $1000 at tax time, you will be fined an extra 12%.

While you're having your taxes done on your business' first year, that's when they can set you up with a quarterly payment plan.  Based on your first year's profits, they'll set up a mandatory tax bill that arrives 4 times during the year.  You'll pay that amount, and it counts towards the taxes for your business for the next year.  Once your second year rolls around and taxes are due, you won't owe much/anything unless your profits went way up compared to the first year.  Each year you can have the quarterly taxes adjusted up or down, so they'll more closely match what you're expected to make over the following year.

I hope this helps a bit.  For me this tax stuff actually screwed me royally last year.  My first year made a lot of money, but the money almost completely stopped on year 2.  The way this screwed me was that I owed thousands of dollars on the first year, and I planned on using profits from the next year to help me pay them off.  Well that didn't happen as planned, and this quarterly tax thing was something I didn't know about before then.  I believe it was a $700 tax bill that arrived every 3 months, which was an absolute killer!  My business wasn't making nearly that much, but the tax amounts are based on the profits from the previous year.  So I guess the moral of the story is to make more every year from your business, instead of going backwards and making less money, ROFL!  big_smile

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-03 13:41:28

Thanks for sharing your experience, Aprone. It's things like the way that profits changing from year to year can mess with you which people really have to be on the lookout for.

If I'm correct, once you're set up as an LLC, you should be able to deduct your expenses, is that correct? I wonder what sorts of things are or aren't counted as business expenses when it comes to developing and marketing games? Obviously that's a conversation to have with a tax professional...

2016-05-03 16:52:11

Joseph, yes once you are registered as an LLC you can deduct business expenses.  For me, I have been able to deduct new parts for my server (as they've worn out due to being under load 24/7).  I get to deduct a sizable percentage of my internet bill (based on the data the server is using each day).  I believe it averaged out to 1.1 gigs of bandwidth per day when I last did my taxes!  To make things easier (and I suggest others doing this if they will ever run a permanent server for their company, and they're able to do this) I set up a small room in my home that basically only houses the server.  Because of this, I am allowed to deduct from my home insurance (I believe), electric bill, and heating/cooling costs for a small percentage.  By being in its own room, that room is considered my work space and the square footage of the room out of the square footage of my house determines the percentage of those bills I can deduct.  These things don't really add up to much, but they do help.

Since I write my own software, I've never had the need to try and deduct any.  Depending on the business, I suppose someone might be able to deduct specific software they had to purchase, be it sound editing tools or something along those lines.

When I was building the See Munkeys, I was not able to deduct the various parts that went into the product, but I was able to deduct materials used up during their construction.  For example, soldering iron tips and solder.  I'm not entirely sure if it was helping or hurting my tax return, but I remember being required to list how much total value in un-sold products I had left at the end of the year.  So if you end up dealing with physical items for your business, keep track of everything.

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-03 16:58:09

Joseph you're right about the yearly profits changing.  It can mess someone up quite a bit if they aren't expecting it.  The way I have my gamer accounts set up, people aren't really renewing them every year.  There is that extra "free" month, people don't get charged for months they don't play, and most people bought in the later half of that first year.  What ended up happening was that almost everyone bought their accounts in year 1, then didn't have to renew until the beginning of year 3 (this year)... skipping that second year entirely.  I should have seen that coming, but I also didn't quite know how all this tax stuff worked at the time either.  I found myself starting year 2 with thousands in taxes to pay off, a crazy $700 bill every 3 months, and basically no side money coming in from the business anymore.  Needless to say, I barely pay my bills before all that so I was totally and utterly screwed.  It will probably be a few years before I dig myself out of the hole I put myself in with that, haha!  tongue  Live and learn.

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-03 20:46:24

Aprone,

I'm so sorry to hear about that tax mess. My wife and I got into a similar mess, albeit much smaller, this year with the IRS - some incorrect assumptions, and some things that weren't communicated well, and next thing you know, you owe a pretty penny. Sigh.

That's so strange that you could deduct materials needed for the work you did to make the gear, but not the parts that actually went into it. I wonder why that is? I guess the former are "work-related expenses" whereas the latter are just considered part of the product?

I'm trying to think of any situations like that from a development side of things. Like, suppose you hire a sound designer, buy some sound packs, and buy some software to edit those sounds and put them in your game. Is the sound designer's pay deductible? The sound packs? The software? This is why tax professionals make the big bucks, I guess.

2016-05-03 20:57:33

Oh I completely forgot about sound stuff.  I have been able to deduct money spent on sound packs.

I'm sure someone out there will be reading all of this talk about deductions and imagine the government gives you back all the money you spent on this stuff.  Lol, if only right?  You basically get to just subtract these things from the total profits you made before it gets totaled up as owed taxes, so it is far from free.  It's more like someone filling your backpack with rocks, and you get to take a few small stones out before carrying it around the block.  big_smile

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-10 12:21:28

Aprone, what happened to the See Munkey? Did anything ever become of it? I liked the performance tests that you put it under that are available from your website as audio files; they were quite amusing.

2016-05-10 15:09:53

Aprone: Right - it's not a matter of getting that money back or anything, it's just a matter of not having to pay taxes on that portion of your income. Still a plus, though, as that means a greater portion of your company's profits actually stay in the bank...

So, one of the things I'm going to need to discuss with a tax guy is how personal income is figured when you're dealing with multiple developers involved in something like an LLC. Does all of the company's income count as income for one of the people involved? Or does everyone involved have a designated wage they make out of the profits, and that's all that counts as their income? If that's the case, then what happens to the rest of the profits for the game? Do they get taxed on the small-business tax, but not the personal income tax? These are the sorts of things that definitely impact groups of multiple developers working together - which is what the audio games market really needs if it's going to continue to grow in scope and quality. I'll definitely let you all know what I learn as time goes on.

2016-05-10 18:49:56

Wish I could help you more, but you're wondering things that are beyond what I've encountered.

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-10 20:36:08

No prob man - I wasn't expecting anyone to answer all the questions. I just thought it'd be good to have a place where we can talk about those things we wonder, pass along horror stories, and share what we've learned. This seems to be one of the sides of the audiogames business that doesn't get discussed much - perhaps because so many audiogames aren't commercially released. Obviously Ian and I are going to be meeting with our own tax pros and getting more detailed information. We'll be happy to report back. Hopefully we won't have any horror stories of our own.

2016-05-10 20:41:14

I'll be interested to hear what info you get about these things.  You've got me curious.

- Aprone
Please try out my games and programs:
Aprone's software

2016-05-27 06:52:06 (edited by frastlin 2016-05-27 17:27:54)

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 Software. 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...

2016-05-27 09:27:04

Very nice post Frastlin!  big_smile

- Aprone
Please try out my games and programs:
Aprone's software

2017-12-22 19:10:08

@Joseph,
If you get a chance to discuss what you have learned along the way, could you post what you have learned here? I am fascinated by finance. I have managed taxes for a nonprofit for a few years now, and secretary of state and IRS are just 2 of the many hurtles jumped by business folk.

Happy gaming,
Eric

In the business world, the rearview mirror is always clearer than the windshield.
Warren Buffett

2017-12-23 00:29:34

@EricY: In short, it really depends on how one chooses to file. Most people doing small business choose to et up their business as a pass-through corporation, where the income passes directly through to the owner(s), in which case it is taxed at the individual rate, and acts like any other income where income-based benefits are concerned. There is also the opportunity of setting up a business entity such as a Chapter C corporation, which pays its own taxes on its own income, meaning that the developers aren't directly impacted by the game proceeds, because the proceeds don't technically belong to them. The disadvantage to this option is that the corporate tax rate is significantly higher than the individual tax rate (assuming the developer isn't inordinately wealthy)—though with the new tax bill that just passed, it looks like the corporate tax rate will be going down considerably. Getting personal income out of a separate taxable entity is also not as straightforward as getting income from a pass-through. So, while I'm certainly not in a position to offer official advice, basically what I discovered was that for someone who is not concerned about their personal income going up unpredictably, setting up some sort of pass-through is the most sensible option; on the other hand, for someone who wants to be able to control how the company's profits impact their own individual income, setting up a Chapter C corporation seems more like the way to go. Other things that can complicate the decision are the number of people involved, the expected income and nature of income versus expenses, and so on. All of these are things we had to consider when deciding how to set up Out of Sight Games.