How do I pay content creators in a sole proprietorship?

Question

I’ve made an app that’s completely free to use and isn’t otherwise monetised, for now. That being said, I want to do a couple things that involve money:

1. For a campaign, I want to donate X dollars per content created on the app.

2. I want to pay influencers to upload content.

For context, I’m the sole creator of this app and will be funding everything out-of-pocket. That being said, I'm interested in attracting outside funding for future donation campaigns, depending on how the first one goes.

I've done a little research about sole proprietorships. My understanding is that if I don't formally set up a business (eg an LLC), then I run a sole proprietorship by default.

Regarding (1), because there's no difference between my personal and business assets/expenses, then I can claim the donation contributions on my personal tax return. Is this assumption right?

Regarding (2), it's not clear to me how to make one-off payments to influencers, or whether I can claim this on my tax return as a sole proprietor.

Answer 1

Whether something is a business expense or not doesn't depend on how you organized your business. If something cannot be considered a business expense for a sole proprietor, it is unlikely to be an allowed business expense for a corporation. LLC, in the US, is a "disregarded" entity and as such doesn't show up on your taxes at all. If you organize as a single member LLC - from tax perspective you're still a sole-proprietor (or corporation, if you so chose).

Whether or not your specific examples can be considered business expenses, you should probably ask an EA/CPA licensed in your State. When you say "donate" - do you actually mean "pay for"? Donations are not business expenses (although charitable donations are deductible on your personal tax return under certain conditions), but if you're paying for something that you use in your business - then it is a business expense.

Answer 2

Yes, if you don't create an LLC or a coporation or some other distinct business entity, than by default you are operating as a sole proprietorship.

It is a good idea to do SOMETHING to separate your personal finances from the business. Most sole proprietors create a business account in the name of the business. Personally I recently closed my business account to avoid paying bank fees, but I keep very careful records of business expenses and keep them separate from my personal expenses.

Big big BUT: If you are not collecting any income, the IRS is not going to accept that this is a business for very long. They're going to say it's a hobby. The difference being that hobby expenses are not tax deductible.

When you say that for a campaign you want to "donate", do you mean donate to charity? Or donate to the content creator? Or what? You can take a tax deduction for donating to an established charity. You cannot take a tax deduction for donating to an individual.

A sole proprietorship cannot donate to charity. The owner can withdraw money from the sole proprietorship and donate it to charity. Basically this just means that donations to charity can't go on your schedule C, they have to go on Schedule A.

As to how you make payments to content creators ... I'm not sure what you're asking. You write them a check or pay them with a credit card or Paypal or whatever, just like any other expense.

If your operation qualifies as a business, then payments to content creators would likely be a deductible business expense. But as I say, if you're not bringing in any income, the IRS is going to question is this is really a business and not a hobby. You can go for a few years with little or no income and say it's a start-up and you're building up to the point of having income, but at some point the IRS will balk. If you're expecting this to turn into non-trivial money, you might want to talk to a tax lawyer or accountant.