Guenther & Associates - CPAs Certified Public Accountants providing Tax Preparation, Bookkeeping, and Accounting Services http://www.guenthertax.com No Kickstarter project should pay income tax in their first year. Thu, 01 Sep 2016 11:51:28 -0700 http://www.guenthertax.com/blog/no-kickstarter-project-should-pay-income-tax-in-their-first-year http://www.guenthertax.com/blog/no-kickstarter-project-should-pay-income-tax-in-their-first-year <p>And if your CPA says otherwise, fire them. I have seen two articles already where a Kickstarter video game project says they had to pay taxes on their left over money in their first year, this makes me sad, because you can easily avoid that.</p><p><em>NOTE: There has been some confusion on this article where people seem to think I am suggesting you avoid or evade taxes. That is NOT the case at all. These methods used are 100% legal ways to reduce or postpone taxes paid. I want to be very clear: ALL OF THESE METHODS are 100% legal and are in no way avoiding or evading taxes.</em></p><p>In order to eliminate taxes all together there is a simple accounting rule and election of income that you can use, if that fails (which it wont 99% of the time), then there are a few more complex methods that can not only reduce the tax, but can set yourself up to have a tax benefit to carry over to future years, and should probably be used regardless of your situation.</p><p>I will start with the first and most simple method:</p><p><strong>ACCRUAL ACCOUNTING</strong>.</p><p>Accrual accounting is an election that is made on a tax return that allows you to claim income when it is earned, rather than when it is received. This means that every video game company (or many others) out there who get Kickstarter funds would not have to pay taxes on those advanced payments until the game is actually made and distributed to those individuals who pre-purchased it.</p><p>Going further, let’s just assume that you have given away items such as T-shirts, artwork, and prizes that you distribute to your backers the first year. You would have to include in income up to cost (or fair market value) of those items on your tax return, because technically you did provide a portion of the service and some of that income was technically “earned”. Therefore, you will be responsible for some of the income earned. What’s important to note, is that you will easily be able to offset that income “earned”...<a href=http://www.guenthertax.com/blog/no-kickstarter-project-should-pay-income-tax-in-their-first-year>Read More</a> Kickstarter and State Sales Tax Thu, 01 Sep 2016 11:49:19 -0700 http://www.guenthertax.com/blog/kickstarter-and-state-sales-tax http://www.guenthertax.com/blog/kickstarter-and-state-sales-tax <p>Unfortunately there is no easy answer here, every state is different as far as their requirements. Hopefully I can clarify a lot of misconceptions though:</p><p>Sales tax has been around for many many years. It was originally designed to tax retail stores for locally sold products. Originally it was a simple system because everyone would buy from their local store.</p><p>Interstate sales started occurring more regular with mail order, then it exploded when eCommerce started making its mark.</p><p>Since that time states STILL do not have a solution for interstate commerce, which means sales made to someone who lives outside of the state where you live is not subject to paying sales tax on their purchase.</p><p>With that historical background out of the way, the simplest answer I could give is that most likely your state only requires sales tax to be paid if you ship a kickstarter reward to someone WITHIN your state. With that being said, your state may have specific rules that may need to be followed, that’s why it is important to talk to a professional who can look up those rules for you.</p><p>Here in California, you are only required to pay sales tax on products shipped inside the state. In addition to that, there is also a district tax for specific areas within California. For Example, if you live in Sacramento, and you ship a kickstarter reward inside Sacramento, then you will have to pay a district tax on that item as well as the state sales tax.</p><p>The absolute best way that you can approach this is to incorporate your business in a state that does not have sales tax, such as Delaware, then distribute (ship) your kickstarter rewards and products from a state that ALSO does not have sales tax. This way you can typically avoid that altogether. This would only be necessary if you feel a lot of your backers will happen from the state that you live in.</p><p>Typically, if you do conduct a successful kickstarter, and you do ship products inside a state that...<a href=http://www.guenthertax.com/blog/kickstarter-and-state-sales-tax>Read More</a> Xbox and Steam Developers Who Are Not US Citizens – ITIN and W8BEN Applications Mon, 29 Sep 2014 11:49:31 -0700 http://www.guenthertax.com/blog/xbox-and-steam-developers-who-are-not-us-citizens-itin-and-w8b http://www.guenthertax.com/blog/xbox-and-steam-developers-who-are-not-us-citizens-itin-and-w8b <p>Also See My Post on <a title="Permanent Link to How a Foreign Company Could Set up Operations Within the US" href="http://www.guenthertax.com/blog/2014/05/how-a-foreign-company-could-set-up-operations-within-the-us/">How a Foreign Company Could Set up Operations Within the US</a></p><p>UPDATE 7/23/14: I have recently been informed that steam has figured out some fast track way to get a EIN and W8-Ben. I have not confirmed this, but here is their website with instructions in case you are interested in trying their way: <a href="http://steamcommunity.com/workshop/workshoppaymentinfofaq/">Here</a> I had always thought that you needed an ITIN or SSN in order to get an EIN, because you must provide a “responsible party” but according to them you do not. I will keep checking on this.</p><p>It was recently brought to my attention that Xbox and Steam Indie Game Developers who are considered to be “non-resident aliens”, in other words foreigners living in another country without US citizenship, have been having trouble getting paid for their royalties through Microsoft.</p><p>After reviewing the site, I can see why, Microsoft provides no legal advice to game devs, and strictly forbids it in their forums. Steam actually has a really good <a href="http://steamcommunity.com/workshop/workshoppaymentinfofaq/">FAQ HERE</a>. Being able to wrap your head around getting an ITIN, applying for zero withholding due to tax treaty status, and dealing with the IRS can be very challenging.</p><p>I hope to clear this up for those people.</p><p>In order to get paid from Microsoft and you are a non-resident without US citizenship, you must:</p><p>1) Have or get an ITIN (W7) or EIN (SS-4)</p><p>2) Submit a form W8-BEN</p><p>Seems simple, right? Well there is a lot of tricky information on these forms. Also, I read in a couple areas of the Forum that people simply got an EIN number. That would be impossible without an ITIN or SS#, so I am not sure how they were able to do that. My advice...<a href=http://www.guenthertax.com/blog/xbox-and-steam-developers-who-are-not-us-citizens-itin-and-w8b>Read More</a> How a Foreign Company Could Set up Operations Within the US Tue, 27 May 2014 11:17:20 -0700 http://www.guenthertax.com/blog/how-a-foreign-company-could-set-up-operations-within-the-us http://www.guenthertax.com/blog/how-a-foreign-company-could-set-up-operations-within-the-us <p>I get at least 2-3 emails a day asking this question one way or another. I figured I could provide a primer in order to do this.</p><p>What would be some reasons a foreign company would want to set up shop in the US?</p><ul><li>Better Taxes – The US currently has a maximum 35% on net income earned in the United States. Even lower on the first $50,000 at 15%</li><li>More exposure – Some companies need to set up shop in the US in order to manufacture product here, sell on Amazon US, use US based services like Stripe, as well as carry their product in US stores. Some video game developers would prefer to have a better tax situation when selling on Steam, or Xbox Live. Regardless, the extra exposure from having a “US based” company will sometimes far outweigh the costs to do it.</li><li>Freedom from VAT tax – In the US, you can set up your company in a sales tax free state, and not pay any VAT or Sales tax on sales of products or services, Sales tax in the US is pretty complex and can be different from state to state.</li></ul><p>Before I dive deep into this, I want to point out that this is not an inexpensive process, at minimum it will cost around $1,500 to do with a yearly cost of at least $600-700. And that is the minimum. The main reason for this is the legal help that is necessary to set up some of these items (which is unavoidable) as well as the mandatory yearly tax and franchise filings.</p><p>OK, first things first:</p><p><strong>1) YOU NEED A US C-CORPORATION</strong></p><p>The reason you will need a C-corporation rather than an LLC (aka partnership) is a that an LLC is usually treated as a “pass-through” entity. This can cause issues if your company in the US makes net income and is required to pass that through to you as an owner in another country. By doing this the The LLC (aka partnership) makes this whole concept of “tax savings” not applicable because you are eventually going to pay tax on any net income from the US in your country.</p><p>With...<a href=http://www.guenthertax.com/blog/how-a-foreign-company-could-set-up-operations-within-the-us>Read More</a> How is it that people like Warren Buffet and Mitt Romney are able to have effective tax rate of only 11-14%? Thu, 24 Apr 2014 11:48:12 -0700 http://www.guenthertax.com/blog/how-is-it-that-people-like-warren-buffet-and-mitt-romney-are-abl http://www.guenthertax.com/blog/how-is-it-that-people-like-warren-buffet-and-mitt-romney-are-abl <p>That’s a great question, and there is no easy answer. This may clarify it a little:</p><p>As individual taxpayers Romney and Buffet pay so little in taxes because of two sources of income:</p><ol><li>They take qualified dividends from their corporations that they own or are investors in.</li><li>They take Capital Gains distributions from investments they have created</li></ol><p>For qualified dividends, between 2001 and 2012 they were taxed at 15% (now its 20%), regardless of what tax bracket you were in. Although it seems like a relatively small amount of tax, before any shareholder is able to receive and pay tax on those dividends, the corporation had to pay a tax on that as well (somewhere in the ballpark of 35-40% usually). This is where double taxation occurs. If the company is a foreign company, lets use the Netherlands as an example, they only charge 3-4% taxes on that income, then it gets distributed to Mr Buffet, and he only pays 15%. Heck of a deal.</p><p>For capital gains, the maximum rate from 2001-2012 was 15% (now its 23.8%). For investments in a “small business” (a company that has less than 50 million in assets), sale of any stock provides a tax deduction of 50% of that sale, this means that sale is now only taxed at 7.5%… wow. This is why there are so many venture capital firms.</p><p>In addition to this, they can also take advantage of investments made in countries with favorable tax laws. Both store a good chunk of their money in overseas, tax favorable bank accounts and investments. Though a slipperly slope for US tax law, many ultra rich investors have many advisors that make it legal. To explain fully would require a whole other blog post.</p><p>So as you can see, using those two methods, Buffet and Romney were able to keep their upper tax limit to around 15%, then using deductions, like donations, property taxes, etc, they dropped their tax rates to around 11-12%.</p><p>That is only for their individual rates, below is how they win with...<a href=http://www.guenthertax.com/blog/how-is-it-that-people-like-warren-buffet-and-mitt-romney-are-abl>Read More</a>