10

I'm creating a KickStarter to raise enough funds to take 3 months off from my full-time job and finish an iOS game that I've been working on for about 3 years now. Put simply, all I need is about $35,000 (after KickStarter and Amazon fees, taxes, and paying for backer rewards). $35k will cover everything my income normally would--health insurance, house, car, bills, etc.--and allow me to invest some in equipment, legal, accounting, etc..

I've been reading that, if I choose to file as a sole-proprietorship or as an LLC, I'll have to pay federal and state taxes just as if it were income from my primary employment. As far as I can tell, this means I should account for taxes being in the area of about 35% of the TOTAL amount raised via the KickStarter.

KickStarter takes 5% of the total amount raised as their fee. Amazon takes the same. That's another 10% gone, right off the top.

After all that, I'll still need to cover the cost of backer rewards out of whatever's left.

Then, once all that has been accounted for, I'll have whatever's left over to invest in equipment and pay my bills and feed my family for 3 months.

On any given day, you can find dozens of KickStarters where developers claim they can make an iOS game for $5000, $10,000, and some for even less. It makes me think that these guys must be coming up with a number that just "sounds good" and throwing a KickStarter up.

All of the above is to give you a background on how I've come up with the numbers below. Am I doing something wrong?

Let's say I start my goal at $230,000. (Wayyy more than I thought I'd be asking for.)

Taxes should be in the area of 35% of that, which is $80,500.

230,000 - 80,500 = $149,500

The KickStarter fee (on the full raised amount of $230,000) is $11,500.

The Amazon fee is the same: $11,500.

$149,500 - 11,500 - 11,500 = $126,500

For each backer reward, I've marked up the donation tier by 150%. In other words, the actual, out-of-pocket cost of each backer reward makes up 40% of the total amount received for that reward tier. (If I pay $20 to have a shirt made and shipped to the backer, then I make that shirt available to backers who donate $50.)

So if I've raise $230,000, I'll have to give back $92,000 in backer rewards.

$126,500 - 92,000 = $34,500

So that leaves me with just a little shy of the $35,000 I need to pay for my expenses for 3 months...out of $230,000!

So, what do these $5,000 iOS guys know that I don't?

It seems to me that the only solution to lowering the overall funding goal is to raise the mark-up on each item to about 400%, about 5 times what the actual cost is, but that means asking $72 for a coffee mug, $200 for a t-shirt, and $300 for a hoodie. I fear that these numbers are just too high. Are any of these costs tax-deductible???

Any help you guys can offer would be much appreciated. Thanks.

By the way, I'm in California.

Improve this question
5
  • 5
    Note that many of these costs should be deductible pre-tax. It's only really your own income that will be taxable directly. I don't know Californian/US law so I'll leave it for someone else to give a detailed answer though.
    – GS - Apologise to Monica ♦
    Oct 27, 2014 at 21:43
  • I've been reading the exact opposite, Ganesh. After the KickStarter is over and you've received your funds, Amazon sends you a 1099-K for the full amount raised. They do not account for their or KickStarter's fees. (source: nofilmschool.com/node/11804) There are lots of other examples too. Taxes are paid on the full amount, when, according to most financial advisors, they shouldn't be.
    – baptzmoffire
    Oct 27, 2014 at 22:04
  • 1
    Kickstarter can 1099 you for the amount raised, but then you count all your expenses to reduce that amount. What remains is your compensation or retained business earnings, which is taxable. If you raise $10k and spend $7k on equipment and tax advice, then that's only $3k of income.
    – NL7
    Oct 28, 2014 at 16:06
  • 1
    Also, having all your backer gifts be things that cost money is not the best strategy. Tshirts and such like are one thing, but how about "you get on the alpha testing list" or "I give a character your name" or "I use a photo of your house as one of the locations" and other things that don't cost money? Or "I will invite you to my exclusive launch party - cover your own travel costs" - you have to pay for the party, but it won't be 20% of what you raise from those who want VIP invites.
    – Kate Gregory
    Oct 29, 2014 at 13:14
  • Way ahead of you, Kate. :) I have lots of rewards that cost little or nothing, most of which are easily manipulable programmatically. In my planning for the worst-case scenario, I was primarily concerned with the rewards I will have to pay cash for. Thanks for the comment though. The more freebie ideas that are out there, the easier it will be for future KickStarter creators.
    – baptzmoffire
    Oct 29, 2014 at 21:26

3 Answers 3

Reset to default
8

You are wildly over-estimating your taxes. First, remember that your business expenses reduce your gross income. Second, remember that taxes are progressive, so your flat 35% only applies if you're already making a high salary that pushed you into the higher brackets of US and CA.

I think the deeper problems are: 1) you are expecting a super early start-up (with no finished product) to pay you the same as a steady job, including health insurance, and 2) you are expecting Kickstarter to independently fund the venture.

The best source of funding is yourself. If you believe in this venture and in your game design abilities, then pay for most of the costs out of your own savings. Cut your expenses to the extent you can.

You may want to wander over to startups.SE to get more perspective and ideas on your business plan.

Improve this answer
3
  • 1
    On its face, it seems like the KickStarter/Amazon fees, start-up costs, and business expenses should be deductible, but the overwhelming majority of those who've run successful KickStarter campaigns says that Uncle Sam taxes them on the full amount raised. At this point, I'm planning for the worst-case scenario. Also, it's not necessarily FUNDING that I need. It's time. I work 40+ hours a week and I have a family. That's why it's taken me 3 years to get where I am. I know the safest thing to do is to consult a tax adviser, but I thought I'd run it by you guys first. I'll re-eval taxes.
    – baptzmoffire
    Oct 28, 2014 at 16:54
  • 1
    Keep your accounting in order, save all your business receipts, keep your business accounts separate from your personal expense accounts, and prepare for an audit. These are legitimate fundraising expenses for a real business.
    – NL7
    Oct 28, 2014 at 16:58
  • startups.SE no longer exists but is archived at brightjourney.com
    – Brady Gilg
    May 18, 2020 at 17:21
7

I think you might be missing something important here. If you are running a business, then any expenses that your business incurs are deductible.

Yes, Kickstarter would report the full amount. The IRS requires them to report everything that you raised. However, the Kickstarter and Amazon fees would be a business expense. Your cost on the backer rewards are deductible business expenses as well. Legal fees, accounting fees: deductible.

Money that you spend on equipment may not be deductible all in one year; you may have to depreciate it over multiple years. This is where the accountant that you are paying accounting fees to will come in handy.

People who do an iOS app Kickstarter campaign for $5000 might have a few things going on that you don't:

  • This might be just a hobby for them, and they aren't quitting a full time job to do it.
  • They might be writing a simpler app than the one you are attempting, so it will take less time.
  • They might have more modest living expenses. $35K for three months of living expenses seems really high.
Improve this answer
1
  • 4
    Another thing to consider is that in many cases the people doing a kickstarter are not necessarily expecting it to be a self-contained transaction that covers their expenses. Rather, they're treating it as "seed money" to develop a product that they will then sell on the open market to recoup the funds/time they invested out of their own pocket.
    – BrenBarn
    Oct 28, 2014 at 2:12
4

There's two big problems here and they are both related to the same thing:

  1. You are paying a lot of taxes
  2. Your monthly expenses are ridiculous at almost 12K per month

The last line says it all: you live in California. CA is a terrible state to do business in. the taxes on this money alone are crushing. Also, while I think you need to re-visit your budget and lifestyle, the cost of living is very, very high in CA and affecting your decisions.

Of course, all of this raises the question - if you can afford 12K in expenses each month, and I'm assuming you're the only source of income, then you should be able to afford funding your own game :D

Improve this answer
4
  • 1
    First paragraph: "...and allow me to invest some in equipment, legal, accounting, etc." If I could decrease the cost of all of this, obviously, I would. Just shy of $5000/mo. for household, $1500/mo. to continue my family's healthcare plan, $5000 ads/marketing, I'll make $5000 work for LLC/copyright/legal/website/accountant/misc., I was hoping to have $5500 to spend on equipment and office, and whatever's left over will hopefully cover incidentals. All of this will be outlined in the KickStarter, of course.
    – baptzmoffire
    Oct 28, 2014 at 16:16
  • 1
    @baptzmoffire that's fine but don't fight your budget in a phone booth. Eliminating the taxes that you're paying on the money is more ideal. By your own estimates, your tax on it is 35% - get out of CA and lower that number!
    – PropositionJoe
    Oct 28, 2014 at 17:19
  • Also considered filing for an out-of-state LLC--I read Wyoming's good?--but I think that opens up a whole new can of worms with the IRS. I don't know that I have the resources to fight that kind of battle or handle that level of business complexity, should that business structure come into question. Thanks for all the advice, guys.
    – baptzmoffire
    Oct 28, 2014 at 17:58
  • @baptzmoffire Nope, that's not going to work. CA caught on to that a long time ago. They will just declare you a "foreign corporation" and subject you to the same taxes and fees. An LLC costs about $1500 to maintain in CA, it costs about $150 in Nevada - only one of the many examples why CA stinks for business. Also, this sounds like it's your first time dealing with the CA Franchise Tax Board . . . I know people that would rather cut their arm off than deal with them. Good Luck!
    – PropositionJoe
    Oct 30, 2014 at 14:49

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .