I make video games by myself for a living.
This process involves many years of unpaid work before a game is released, and then a sudden "windfall" type wave of money when the game finally comes out. In a single year, these earnings can appear huge (like, several hundred K in a single year), but spread out over the time it takes to actually make the game, we don't make that much money per year.
Our problem is that for tax purposes, we are "rich" one year, and taxed at the highest rates, but make so little in the other years (so poor) that we can't even take advantage of the personal/child deductions in those years.
If we spread this income out over all the years, we'd be taxed at a lower rate each year and be able to take deductions every year.
My "back of the napkin" calculations are showing a hug difference in tax paid for the same income received in one year or spread equally out over four years, roughly a 70% reduction in taxes.
And it's really "not fair," because we're not rich, nor are we living richly, but we're being taxed like we are rich that one year when the money comes in, but we need that money to be able to survive through the other years while I make the next game.
The only way I can see to "spread the income out" over more than one year would be through a c-corp.
Suppose that I spend 3 years making a game with no income, and the year that I ship it, it brings in $400K. I could pay myself $100K that year, and keep the remaining $300K in the c-corp as justifiable retained earnings (to make more games), which would be taxed as profit at the corporate rate of 21%.
Over the next three years, there would be no income as I worked on the next game, but I could still pay myself $100K per year as salary, and pay personal income tax on that salary. But that $100K/year would be a loss for the c-corp, which could be carried forward and back as needed to re-coup the 21% that was paid in corporate taxes.
Then, after three years, the money would all be gone, with a net corporate income of $0 (thus, no corporate taxes paid, with the original tax refunded through carried losses), but personal income of $400K spread over four years of $100K, and personal income tax paid on the whole amount.
But then I'd ship the next game, bringing in $400K again, and the process would continue.
Earning $100K/year for four years is MUCH better in terms of taxes than $400K in one year and $0 for three years, right?
And the only way to achieve this is through a c-corp, right?
Am I missing anything here?
There's a similar post here where everyone answers that it's not possible:
But.... how do the big companies that make movies or video games do it? They might spend $100M making a movie/game over 5 years, and then suddenly get $110M in one year when the movie/game comes out. If they spend $110M on the next movie/game over 5 years and it flops, I'm SURE they're working it out so that they're not paying taxes on the $10M "profit." It was eaten by losses later. But all their employees paid tax on the entire $210M, which was paid to them as salary over the 10 year period. The company effectively made $0, though. So the dreaded "corporate tax rate" or "double taxation" is a non-issue.
And yeah, seek professional advice. But I like to do things myself, and I'm assuming that other people here like to do things themselves as well, or else we wouldn't be here...