Kickstarter Lesson #4: Accounting and Finances

16 January 2013 | 127 Comments

I’m writing this post today for two reasons:

  1. I met with an accountant for the first time ever today (I’ve done all my taxes on TurboTax up to this point, but now I have a board game company, so I got a real accountant). I learned a lot of stuff that I want to share with you.
  2. The first three entries in this series have been about things to do WAY before your Kickstarter project launches. Accounting and finances definitely need to be on that list too.

Let’s start with the main reason you need to track your project expenses and revenue:

Kickstarter Creators Must Pay Income Tax

Yes, Kickstarter is not a store. But for almost all pledges, you are providing a good or service, and they are giving you money for it. Thus you need to pay taxes on your profits (or get money back from the government if you lose money).

The good news is that you don’t actually have to pay income taxes until you fulfill your pledge promises. On the flip side, the expenses that went towards creating those pledges aren’t deductible until you fulfill your pledge promises. You still need to hand over all of that data to your accountant in the current year (including this form from Amazon if you raised over $20,000 or had more than 200 backer transactions), but you shouldn’t have to pay for any taxes in this fiscal year. Except for one thing…

Kickstarter Creators Must Pay Sales Tax for In-State Backers

Sales tax is different than income tax, because sales tax triggers at the point of sale. Which, in this case, is when a backer’s credit card is charged. The good news is that you only have to pay sales tax for in-state backers. This applies for Kickstarter pledges and any pre-orders you accept after the campaign ends. Make sure you calculate this additional expense when you create your reward levels. From then on, you’ll fill out a quarterly form on your state’s department of revenue website that indicates the amount of sales tax you owe them.

Here’s How to Save Money on Accounting

Okay, so now that you know that you have to deal with taxes, here’s how to deal with it effectively. Because having an accountant is not cheap! (You still need an accountant, though. I would highly recommend Justin Marty at Anders CPA in St. Louis. You want an accountant who has worked with Kickstarter companies before, and Justin has done that for us and several other creators of various sizes: jmarty@anderscpa.com.)

Right about now you might be asking why you should worry about all of this now. After all, you’re still creating your project–you haven’t even launched your Kickstarter campaign yet. Here’s why:

You’re already spending money on your project.

In fact, odds are, you’ve already been spending money on your project for quite some time. And you’ve probably been using your personal credit card or checking account or PayPal account. Which is fine. Don’t panic. But you need to make a change right away. Three changes, actually:

  1. Open a checking account solely for the project. I use Capital One 360 (formerly ING) because it’s free, easy, secure, and it pays healthy interest rates, even on checking accounts. Plus, you get a debit card with the account, so that’s two birds with one stone: You can now make almost all purchases through this account, and you can link your Amazon account to the checking account to receive pledge payments when your campaign ends. If you use my referral link, I get $10 and you get $25 from Capital One 360. Note that you can’t use that account to make international wire transfers, though (I use TransferWise for that).
  2. Open a PayPal account solely for the project. You’re going to use PayPal. Trust me. If you hire any freelancers, you’ll pay them with PayPal. If you want to accept pre-orders after your campaign, you’ll receive them with PayPal. And if any backers forget to add international shipping to their pledges, you can ask them to pay you via PayPal. But you don’t want all of that money mixed in with your personal PayPal account, because that will add that much more time for your accountant to sift through everything.

Also, taxes aside, by separating personal and business expenses, you’re making it easier for you to make a case of corporate liability instead of personal liability if you ever get sued. Hopefully that’ll never happen, but cover your ass(ets) by separating your accounts.

So go open those accounts. Seriously. Right now. I’m not even kidding. I waited until I “had time” to do it, but it will literally take you 30 minutes at most to get both of those accounts set up, and you will thank yourself in the long run for not mixing all of those expenses together.

I keep track of all expenses on a spreadsheet, which has proven useful. But my accountant told me that it would have been better if I used Quickbooks, so you might want to consider that (it syncs with TurboTax, so if you can figure out TurboTax Business, you’ll save some money that way too).

Incorporating Your Company

You don’t need to set up a company to run a Kickstarter campaign. If you do decide to set up a company, the timing of when you set it up doesn’t matter (i.e., it doesn’t need to be a priority before a campaign). In fact, it’s something you may want to wait to do until after the campaign, as it costs money, and your campaign may not successfully fund.

Each state has different laws for incorporation, and I would recommend LegalZoom to help you with that. There are several different ways to set up your company depending on how many people are involved, the potential for growth, number of investors, etc. As an example, Alan and I set up Stonemaier Games as a limited liability partnership, which basically means that I pay taxes each year based on the percentage of the company I own, and Alan does the same based on his percentage. We have an operating agreement that we can change at any time without having to go through any outside party.

***

If I’m missing anything or if I have any of this information wrong (and you can support your claim with evidence from an accountant, not just something you heard in passing), please let me know. I want this post to be as accurate as possible to future and current Kickstarter creators.

Also read this extensive post written by another project creator about tax implications (thanks to Tyler for sharing this on Facebook).

And this post by fellow creator James Mathe.

Up Next: Kickstarter Lesson #5: Connecting with Bloggers

127 Comments on “Kickstarter Lesson #4: Accounting and Finances

  1. I’m not a CPA but I have a strong financial background. One thing to consider is if you operate on a cash basis (which most sole proprietors/LLCs do), the money you receive from Kickstarter will be income for the year you receive it. The expenses you pay to fulfill your rewards will be expenses for the year you spend them. You better make sure those years line up otherwise you are in a world of hurt.

    For example, let’s say that you have a crazy successful campaign and you raise $1 million in December, but you don’t have to ship anything or pay the factory until the next year. Well, in the year you earn the money, you’d owe taxes of $300k-$500k depending on which state you live in, how you set up the company, etc, if you are on a tax basis. That doesn’t leave much to fulfill the rewards next year.

    1. Thanks Kirk. I think that’s why the accountant suggested that Kickstarter creators base accounting on accrual, not cash flow. Because you’re right–you could take a major hit if the revenue and expenses don’t match up in terms of cash.

      1. So that’s a major caveat to “The good news is that you don’t actually have to pay income taxes until you fulfill your pledge promises,” since most LLCs base their accounting on cash flow without really thinking of the consequences.

        Such great info to pass on to potential creators! Thanks for this (couple year old) discussion!

      2. Jamey: Two questions and a comment. Question one, what about allocating spending, a business can allocate certain amounts of income for spending to reduce taxes in a year.
        I work in business management and while the goal is to pay zero in taxes, the accountant handle everything. As a manager I get numbers I’ve got to meet, I’ve got to spend money and save money. All those rewards your giving out, why wouldn’t you be able to count those as income loss the same year in which they are financed?

        Also, consider purchasing a building or property and equipment which you could use for tax deductions and sell in the future for capital gains, heck you could even purchase a place an lease out most of it, just put your office and storage at that location.

        It may behoove you to make a large order of past games you’ve made and get those in your distribution channels so you can count that as same year loss. Use the income generated from those to finance the new game. It sounds like you are paying way too much in taxes, I hope not, I’m almost sure you are, have been.

        Why not get a loan to finance part of the board game production? (I’m sneaking in a third question) Then you can offset some of that crowd funding burden.

        Question two, as a publisher, have you considered opening up a foreign location of business so that you can leave a lot of that income offshore? Would that have many benefits for you, I wouldn’t see why not.

        How have your taxes changed since deciding not to crowdfund your projects, and how much did this weigh into that decision? I’m sure you don’t really have a grasp on what’s going on with all that yet since your right in the middle of all that.

        Feel free to be as brief as you like. I understand your busy, believe me. We appreciate you’re doing this.

    2. To expand on my last comment a little bit: you’d owe those taxes because that entire $1 million is profit because you had no significant expenses. Let’s say it actually cost you $700k to manufacture and ship the rewards. If you pay those expenses in the same year you earn the money, your taxes are now on $300k so they’d be $90-$150k depending on various factors. But if you pay them the next year, then the next year you would have a $700k loss, but that won’t get your tax money back.

      1. I had originally planned my upcoming Kickstarter for October of this year, but pushed it back to January 2nd, 2014 to avoid as much of the tax issue as possible. It also gave me more time to catch any mistakes made during my Kickstarter campaign planning, which is always a good thing. If all goes as planned, it will run for the month of January with a delivery date of December. I think the only issue I could have with it now is if it overfunded it might take longer to fulfill extra goodies made due to Stretch Goals, causing it to dip into 2015, but I don’t think that will be a big issue. Cheers all!

        1. @Cosmothea, I’m going to do the same thing: Push KS back to Jan. In the mean time, I’m creating a separate bank and paypal account (maybe even a credit card that earns points on purchases). Thanks, Mr Stegmaier!

          1. No problem! And as you pointed out, there’s nothing wrong about going with accrual. I would worry a bit about a ton of Kickstarters launching in January. Eventually you’re going to have to pay those taxes (and get a refund against business expenses) either way.

          2. That’s what I’m doing too. Well, I opened up a Paypal account to keep business separate from non business, but via QT Games LLC, all transactions, whether Kickstarter or not, will go in that biz account (so it’s not Kickstarter only) and I’ll be opening up a bank account exclusively for the biz (haven’t been selling anything yet, so no need in the past, but will do so for the upcoming Kickstarter.

            @Jamey – I sure hope there aren’t too many Kickstarters up in January – at least not too many in the industry I’d like to participate in or it will be harder to get noticed, I’d think. Even so, January it is, because I plan to publish in December, so I can’t push it back further without more headaches. No big. I’ll be ready. Good luck with yours, David, and your next one, Jamey!

          3. @cosmothea, good luck with your Jan KS! I look forward to utilizing the (possible) mega amount of table top KSers that month to our mutual advantage: cross promotion. The Zooligans KS did it well.

      2. This is an old comment, but I just found it and thought I’d jump in. It sounds like you both (Kirk and Jamey) have more knowledge and experience with this than I do, so I wanted to ask: couldn’t you get around this whole tax issue (of collecting one year, spending the next) simply by adjusting the fiscal year of your business entity?

    3. Kirk, so basically are you recommending that an LLC shouldn’t launch a Kickstarter if they’re not planning on shipping the product in the same year?

      We are planning on launching a campaign on October 8th 2013 but the product won’t be delivered to backers until October of 2014.

      Thanks for any clarification on this!

    1. Thanks for the heads up! I updated the link. It looks like they increased the bonus, changing the URL in doing so.

  2. “including this form from Amazon if you raised over $20,000 or had more than 200 backer transactions”

    I believe instead of “or” this is actually an “and,” just thought I’d make a note of it!

    Thanks for the article, it’s nice when successful people share their experiences and advice. And the accrual accounting is a big thing to know about in the prepaid world of Kickstarter campaigns. It seems like a better practice than trying to time your Kickstarter campaign just right because you’re using an accounting method not meant for your style of business.

    1. Hmm…interesting. Can you find where on Amazon it says “and” there? I thought it said “or,” but I’m happy to change it if it’s wrong!

      I agree with you about the accrual method. I’m sure any accountant will know how to do that.

  3. Hello this is Rachel! I just had a question, how do taxes work on Kickstarter?

    In your article on accounting (https://stonemaiergames.com/kickstarter-lesson-4-accounting-and-finances/) you say that we need to pay taxes on them. However, I was reading on Kickstarter that you can write it off as a gift.(See quote) Can you help clear this up for me?

    “Beyond deductions, a creator may be able to classify certain funds raised on Kickstarter as a nontaxable gift, and not income. A gift is something given out of “detached and disinterested generosity” for personal reasons and without the expectation of getting something in return.” -http://www.kickstarter.com/help/taxes

    Thanks!!

    1. Hi Rachel, thanks for the excellent question. The vast majority of rewards on Kickstarter are eligible for taxes. What Kickstarter is referring to (“detached and disinterested generosity” for personal reasons and without the expectation of getting something in return.”) are rewards that aren’t really rewards. For example, say you have a project to fund your new bakery. You offer these rewards:

      $5: A high five and a hug when you visit our new bakery!

      $10: A complimentary cupcake when you visit our new bakery!

      The person isn’t really getting anything in exchange for the $5–there’s no cost associated with a high five and a hug. But for the $10 reward, they’re paying for a cupcake, and you need to pay taxes on that.

      Make sense? If you have a particular reward level in mind that you’d like me to address, I’m happy to help.

  4. We successfullly finished a KS in October and were rewarded $28,000. We are dealing with fullfillment now. Many of our supporters did not choose a reward at all. Does that mean I can consider that portion “detached and disinterested generosity?” This is great info, as I am preparing to pay taxes.

        1. Mat: No, I don’t think so. Very few backers give just for the sake of giving. Most want a reward in return. The amount of money they pay for the reward is the cost of the reward and is thus fully subject to sales tax (the cupcake example you use in your previous comment isn’t accurate). Keep in mind that this is only for sales tax, which in the US is only calculated for backers in your state. All Kickstarter funds–whether they’re pure gifts or pledges expecting a reward–are subject to income tax.

  5. Hi Jamey, I’m curious now that ING direct USA has been sold are you using Capital One or a different bank? Sad to see them go here, because they’re actually my bank in the Netherlands which seemed convenient.

  6. Hi, Jamey. Your blog’s has been so helpful. Just to clarify– if my manufacturers and art designers are located outside the US (HK), I can still input that under project expenses as long as I keep the receipt they issued, am I right? I mean it doesn’t matter if your suppliers are local (US-based) or int’l? Thanks.

      1. Thanks for the reply. I’ve been researching on foreign suppliers and what I found (well, how I understood it anyway) is that 30% of the payment must be withheld for the purchase to valid for input tax. when requesting for quotes from Chinese suppliers, I doubt they’d be agreeable to a 30% payment withholding… so if they don’t agree to it, that purchase cannot be listed/credited… did I understand it correctly? Thanks.

          1. Thanks, Jamey. I think I can’t wing the accounting on my own and must consult an accountant.

  7. Hello Jamey! I have opened my Capital One account and a separate Paypal account. Will the Capital One account be sufficient for all of my banking needs post Kickstarter? Our campaign is funding soon and I was wondering if I need to set up another account to handle all of the Kickstarter funds. Thank you so much for all of this wonderful advice!

    1. Loren: In regards to your banking needs, Capital One 360 takes care of everything. PayPal is handy to have too for freelancers and accepting payments through services like ShopLocket.

  8. Jamey: Thanks very much! I thought Capital One would be fine for small needs but wasn’t sure if they could handle a fully funded Kickstarter and the needs to accompany that. I was thinking about opening an Account with US Bank. Their business banking is absolutely free. They have no monthly fees, no transaction fees, and free online banking and are the 2nd largest bank in the US. I need an International Check or Foreign Draft check to register my business in the UK and wasn’t sure if Capital could take care of that.

  9. Hi Jamey and all,

    You’ve posted a lot of good information and as a future game creator, I thank for sharing your knowledge–it has been been very helpful to me. I am a CPA and my day (and often night) job is at a large accounting firm. Despite the long hours, I come home every night to work on my game as an escape. Hopefully in a few months, my friends and I will be launching our Kickstarter campaign.

    This is all very good information and possibly one of the most important considerations to take into effect. Uncle Sam (and other countries) will take a big chunk of your profits and tax planning is a vital consideration in your future success. Jamey hits the nail on the head on a lot of topics. However, I understand how taxes can be cumbersome and confusing to many. I will be willing (time permitting of course) to help anyone here with tax/accounting questions. With that said, I cannot advise you with specific tax advice and instruct you what to do, but I can speak generally. Of course, I recommend hiring an accountant (or asking a friend) for any extensive and ongoing questions.

    I hope this will be my way of giving back to this site for receiving all this invaluable information that will be vital to my game’s success. Please send me a message if I can be of any help you guys and best of luck.

  10. Jamey: “360 Checking cannot be used for business, power of attorney, beneficiary or individual retirement accounts” I don’t really know why it can’t be used for business any more, but it seems that they don’t like that.

    1. Andhegames: Thanks for your comment. I don’t really know how strict CapitalOne is about that. I think they’re trying to avoid hosting big corporate accounts in a structure that’s made for personal checking, but for sole proprietorships and more basic businesses, it’s pretty much indistinguishable to them. However, if you have recommendations for other business checking accounts, feel free to share them here!

  11. Great post. So when is it necessary to form an LLC, to avoid any potential liability? Before fulfillment?

    So if I just use a business checking account ( as sole proprietor ) then It will be easier for taxes?

    1. Thomas: Exactly, before fulfillment is the latest you would want to form an LLC. Really you can use any type of checking account as long as the sole purpose of that account is for business.

      1. Once the business checking account is opened, do you recommend just paying with the associated debit card? What about using a credit card? Should I open a new one and only use funds from the business checking account to pay for it? Can I use an existing credit card?

        I’m starting to look into the account/financial part of getting my project and it’s very intimidating. Thanks for this helpful post.

  12. Hi,

    I have the following questions:

    1) Is having a friend in the UK enough to create an UK campaign?

    2) Do I need to start a company in my own country or even the UK to do this right?

    3) Does the UK take VAT and does my friend have to pay income tax or they both apply to me in my own country after I receive the money from him?

    4) Can he transfer the funds without a problem or without having to pay fees?

    5) If I have a campaign in October will I have to pay income tax by the end of the year or when the goods are delivered, next year?

    Thanks a lot. People that want to use kickstarter usually don’t really know about all these things and the information is just too hard to find out. And I’m not even sure if contacting an accountant in my country is enough legal advice on this international problem.

    1. Hi, thanks for your questions! I’ll do my best to answer them, but other better informed commenters are welcome to chime in as well.

      1. Having a friend in the UK can help, but the real key is that you need a bank account in the UK (which you might be able to get yourself). Your friend would create a Kickstarter account for you to log in to, and they would link their UK bank account to it. After they received the funds, they would transfer those funds to your bank.

      2. You actually don’t need to start a company anywhere. I recommend it for liability reasons, but it isn’t necessary.

      3. In the case of Kickstarter, my understanding is that no VAT is paid until the goods enter the country.

      4. Usually banks charge an international wire transfer fee, but it’s minimal–$50 at most, from my experience.

      5. If your campaign is in October, you’ll report all expenses paid towards the project (advertising, manufacturing costs) in 2014, but based on accrual accounting, you won’t report revenue until you deliver the products in 2015.

  13. Hello Jamey and everyone else! First of all, thanks again for this wealth of information. It’s helping heaps towards our own Kickstarter :)

    We will launch the KS in the UK, and will fulfill our duties with HMRC promptly. BUT, we do have some blind areas regarding international taxation.

    In the USA, for instance, we understand that you don’t have to pay sales tax unless you have a “nexus” in some (or various) states, and then collect taxes in those states. Do you think Kickstarter (or Amazon) constitute such nexus? Plus, will we be liable for Corporation Tax?

    And regarding other countries (let’s say Japan, Argentina…) how did you manage to fulfill tax requirements? Who helped you in your way?

    Well, thank you!

    1. Jon: Exactly, that’s a great question Kickstarter/Amazon (now Stripe) do not constitute as locations for that tax. Rather, it’s where your business is registered that matters. So if you’re registered in the UK, you only need to worry about local sales tax. You don’t have to worry about paying tax to any other country.

  14. Jamey,

    FYI – opening my Capital One 360 today and noticed it said it was “not for business accounts.” No idea if that is just their preference, or if it has legal ramifications for an entrepreneur’s liability (even in an LLC).

    Just wanted to point it out.

    Thanks!
    A.J.

    1. Thanks A.J.! It’s completely fine to use Capital One 360. Here’s my reply to a similar comment above:

      “I think they’re trying to avoid hosting big corporate accounts in a structure that’s made for personal checking, but for sole proprietorships and more basic businesses, it’s pretty much indistinguishable to them. However, if you have recommendations for other business checking accounts, feel free to share them here!”

  15. Hi! Thank you SO MUCH for sharing this, your blog is amazing! I wrote to the accountant you mention but he never answered. Do have any other to ask for advice on this matter? Thank you!

    1. Hi, I’m sorry to hear you didn’t hear back from Justin. It’s tax season in the US, so I’m sure he’s very busy. Also, he’s not really looking to give advice–rather, he’s looking for clients. So I would recommend that when you contact him, you let him know that you want to be a client (not just someone looking for advice). I’ll try to find an accountant who is willing to offer advice–actually, John Wrot of The King’s Armory is an accountant and really knows his stuff. You might try to reach out to him.

      1. Hi! I know, we are planning to pay for advice to have a few questions answered and then if we decide to go on Kickstarter finally, we will need an accountant so we would hire him again for that if he was of help. We are not looking for a freebie. Dont worry.
        Tax season might be the reason, yes. Thanks!

  16. Hi Jamey! Thanks for sharing this information! So if I plan to incorporate before fulfillment, after knowing I have a successful campaign, how will the funding be taxed? Will it be taxed as personal income under my social security number since I won’t have a business EIN until I incorporate? Kickstarter doesn’t allow tax information to be changed after a campaign launches, so how would the accounting and tax info transfer over from being registered on Kickstarter as a sole proprietor to a LLC, C Corp, etc.? I’m sure no one wants the whole funding amount applied as personal income! Thank you!

  17. Joanna- The answer to your question depends more on how you plan to structure your business. Having an EIN is only one step to show the IRS (assuming you’re US) and your state that you’re treating the funds as business income. I wouldn’t worry about the information that you enter into Kickstarter (but definitely do work on getting an EIN for tax time). I’d highly recommend you talk to an accountant or cheap lawyer, and read through SBA.gov’s articles on pass-through business entities to get a handle on what you’ll personally be on the hook for.

  18. Hey Jamey, thanks so much for all of your time and advise. I loved your book and have been hitting the blog as well. I had a quick question about Kickstarter taxes, just to make sure I understand.

    So, I hope to raise at least $50k for my upcoming Kickstarter for Gamut magazine, on 2/1/2016. We are supposed to launch the website on 1/1/17.

    Let’s say we raise $60,000. Kickstarter/Stripe sends me that 1099-K saying I made $60k (less their fees of 5% + 3%, or $4,800). I then send out most/all of that $55,200 to pay authors, website designers, illustrators, legal fees, etc. Let’s say I pay myself $5,000 at the end of the year as Editor-in-Chief.

    1. I have not set up a LLC yet, as I don’t want to incur those costs unless I reach my goal. So funds will be deposited into my personal checking. I WILL set up a LLC, and an account, and then transfer funds over when the arrive. Will that be okay? Don’t want to get taxed twice.

    2. If I pay out all $55,200 for expenses, will that offset any possible income taxes I may have? I understand I only have to pay state taxes for people that are in Illinois.

    3. I understand that I will PERSONALLY have to pay taxes on my income as Editor-in-Chief, that $5,000 I made. But if the business is a wash (or a loss) I shouldn’t have to pay any taxes, right?

    4. Also, if I actually launch on 12/31/16 I can have expenses/income in the same year, right?

    Thanks. Hopefully this is all clear and makes sense.

    Peace,
    Richard

  19. Richard: Thanks for your questions. I’ll do my best to answer them, though I’m not an accountant, so take it with a grain of salt. Your best bet is to talk to an accountant–I recommend Justin Marty at Anders CPA here in St. Louis, as he’s now well versed in Kickstarter-related accounting.

    1. I don’t think you’ll get taxed twice.

    2. The state tax is sales tax, which is different than revenue earned or expenses paid. You’ll report both your expenses and revenue for the year when you deliver rewards, and expenses will offset revenue.

    3. Revenue is revenue, whether or not you’re paying yourself or someone else. But I think what you’re getting at is if you have $10k in expenses and $10k in revenue, it’s a wash. You’ll still report both, but I’m pretty sure the IRS sees that as a wash.

    4. When you launch doesn’t matter for accrual accounting. It’s when you deliver that matters.

  20. Thanks, Jamey. Salt taken. I’ll give Justin a call, too.

    1. Cool

    2. Okay

    3. Okay, that’s what I thought.

    4. Launch IS delivery, as we’re selling subscriptions. So, while we are posting content all YEAR, it’s a website, not specific issues, ongoing. So, wouldn’t that be considered delivery?

    Much appreciation.

  21. I’m not sure about ongoing content like that, though I would guess the delivery rule still applies. I see what you’re saying about “launch.” That’s a term I typically use for the first day of the crowdfunding campaign itself, not the product, but your question makes sense in that context.

  22. Sorry, yes, the delivery of the actual website, with content starts 1/1/17 but we could move it up to 12/31/16 to keep the initial access in 2016. I mean, if you joined a gym, wouldn’t it start the first time you were eligible to go in? We’re essentially granting access, I guess.

    Thanks, Jamey.

  23. Excellent blog!! I have a simple (…I hope!) question regarding sales tax. If, as a reward for a contribution of $100, I offer a copy of my book, which has a retail value of $35, should the sales tax be computed on $35, or on the entire contribution?

    Thank you!

  24. Len: Thanks for your question. I’m pretty sure that sales tax is calculated on the amount the customer pays. In this case, the customer paid $100, so sales tax is calculated based on that. You only have to pay sales tax for in-state customers, though.

  25. Thanks, Jamey, for the quick reply. Your answer is pretty much what I had assumed, so I’ll use that as I estimate expenses. Thanks again!

  26. I was told by a lawyer and a CPA that kickstarter funds are not taxable because they are not revenue, they are gifts. If you’re grandma gives you $40 on your birthday, you don’t pay taxes on it.

  27. Sorry Jordan, but the lawyer and CPA are incorrect. The correct analogy would be if your grandmother gives you $40 because you promise to make her a board game. Exchanges of goods or services are not the same as donations.

  28. As I was setting up a business prior to heading into Kickstarter, there were expenses. Plenty of them, actually and they all related directly to what I was doing in the Kickstarter. I couldn’t have done the Kickstarter without those expenses and they amounted to more than I was asking for, all told, but of course I can use some of those purchases to help do future work for my publishing company.
    All of those expenses help offset the taxes that I had to pay for my Kickstarter funding.. According to my tax man, some of those expenses could even be carried over one or more years to reduce taxes in following years, at least in Las Vegas, where my business is set up.

    As for donations, if you are giving them something for their reward tier, which is usually the case (and usually expected), then it isn’t a donation. Now, if they select “No Reward”, that’s another matter, but I’m no lawyer. Lawyers and CPA’s are still learning the ropes when it comes to crowdfunding, Jordan. That’s why Jamey suggested finding one who has experience in it. Your lawyer might not have realized rewards were given out.

    A side rant, it drives me nuts when people run a Kickstarter campaign and use “donation” lingo when they are giving away rewards. I’d say pre-ordering is much more accurate more often than not. You are producing a product and they get it for giving money. That’s buying, essentially, or investing in a future release – i.e. preordering.

  29. CPA here. I would say the first point in your post is partially correct. Kickstarter funds for creators that are selling/providing an actual good or product to backers are essentially considered pre-sale or advance payments.

    Generally, businesses are required to include an advance payment in income in the year in which its received. However, you can use an alternative method of reporting.

    For example, if you are a retailer who uses an accrual method of accounting and account for the sale of goods when you ship the goods, you can include advance payments in gross receipts for tax purposes in the tax year in which you receive the payments or the tax year in which you ship the goods.

    If you have an agreement to sell goods properly included in inventory (debatable for a kickstarter campaign, but if I’m the IRS, I’m arguing that you do have an agreement), you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet all of the following requirements:

    -You account for the advance payment under the alternative method
    -You have received a substantial advance payment on the agreement
    -You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement

  30. Hi Jamey,

    Thanks again for amazing insights into all that comprises a Kickstarter. I’m trying to get my head round it and bit by bit, it’s working.

    I wanted to ask though… (I’m a UK citizen) In EU we’d pay VAT on games coming into the EU, are there similar taxes I need to worry about in different countries? And where can I find out how much they’d be so I can factor them into my pledges? I wouldn’t know whether I pay a sales tax in the USA for example, and if so how much….

    Thanks so much

    1. Jamie: You’ll need to pay income tax in the UK on your revenue, but for shipping Kickstarter rewards, you just need to pay import taxes/fees like VAT. I’m not aware of anywhere in the world except the EU that has a significant import tax–usually it’s 1-2% at most.

  31. Forgive me if this has already been asked, but how do you estimate how many people will pledge at each level, and how many people will be pledging from my own state (so I can figure estimated state taxes into my budget)? I’ve studies other campaigns and their percentages, and I realize that the most pledge at $30 and less at either end, but how do you come close to budgeting for all tiers? I feel like I’m missing a key things here…. Thanks!

  32. Lets say that you ran a campaign in 2014 but due to problems, some related expenses hit your books in 2015 and the bulk of expenses hit your books in 2016. I’ve read differing reports online about how this can be handled. Kickstarter suggests that this can be addressed with the accrual method. In some places I’ve read that you can defer income to match it with expenses but only for one year. And this article in Forbes suggests that all the income must be reported in 2014. http://www.forbes.com/sites/cameronkeng/2013/04/17/warning-kickstarters-policies-cause-irs-tax-audits/#40246744158b

    Is this a “grey” area or is there a definite correct answer. And has anyone actually dealt with the IRS on this topic?

    1. Wendy: I think there are various ways it can be handled. I use the accrual method as described in this blog post. In the situation you described, under the accrual method, it doesn’t matter when the expenses are incurred. The only thing that matters is when the product is shipped to backers. Until then, you do not report expenses or revenue (or maybe they’re reported, but they don’t factor into your taxes).

      I’m not an accountant, so if you’ve run into this situation, I would recommend talking to your accountant.

  33. Jamey: thanks, as always, for the quick response. I assume you’re referring to the “advanced sales” alternative method described here: https://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270659

    That might help for those who ship in a different year than they fund. But it looks like it can’t span more than two years (another good argument for launching campaigns early in the year).

    My tax person is looking into this and I’ll report here if I learn something relevant. I know there are some CPA’s watching this thread. I hope some of them will chime in if they know something relevant.

  34. “The good news is that you don’t actually have to pay income taxes until you fulfill your pledge promises”

    THIS IS NOT TRUE
    Even if you use the accrual method of accounting you can’t just accrue a liability when there is no obligation to pay the money back.
    You could keep all the Kickstarter money and no one could do anything about it.

    I’m from CA. I’m an accountant, a CTEC certified tax preparer, and a CPA candidate.

    1. Davey: Thanks for sharing! Obviously I was referring to creators who actually fulfill their rewards, but you bring up an interesting edge case: What if a creator doesn’t fulfill their rewards? Or, more commonly, what if a creator fulfills rewards much later than expected? Perhaps you can offer some value by sharing how and when those creators report their expenses and revenue.

  35. It seems a lot of game-related KS campaigns are producing a tangible product, like a board game or card game. From what I understood from reading your blog and other entries around the web is that you get the money from Amazon and that’s income, but when you pay for production of the game (tangible product), then it’s an expense that can be deducted from the income you received. My accountant thinks that the payment for production is actually purchasing an asset, since it’s a physical game, and that the deductions would be amortized over a period of years instead of all at once. Is there something I’m missing? Am I explaining it incorrectly to my accountant?

    Thank you in advance! (sorry if this is a double post, I tried posting this question up earlier but it doesn’t seem to be appearing)

    1. Aaron: Thanks for your question. I think the only case in which the games would be amortized is if you still have them in stock at the end of the year. For example, say you run a Kickstarter in 2017 and make 1000 games. You deliver that game to backers in 2018, so all of your expenses and revenue count for 2018…unless you have some of those games still in inventory on December 31, 2018.

      1. Thank you very much for your reply, Jamey! So the amortization occurs only on leftover stock, with the initial payment to whomever I’m going to for production being counted as a general expense? Like, say I put in an order for 1,000 units but my Kickstarter backer count is 800, the 200 left over would be amortized? Thank you again for your response.

  36. Are there any negative implications of setting up a new game company as a sole proprietorship vs an LLC? Such as, are there issues with distributors doing business with you or not doing business based on what type of company is formed? I’ve been reading here that it’s ok not to start up the company before running a Kickstarter, however I just want to make sure it’s set up correctly to be able to properly work with distributors and retail stores after the Kickstarter.

    1. Jer: From the perspective of the gaming industry (not the IRS, for which there are definitely implications that are well beyond what I know), your registered business structure does not impact distributors, retailers, brokers, manufacturers, etc. However, for liability and bankruptcy reasons, I would recommend the LLC or S-corp structure over a sole proprietorship.

  37. I have been trying to setup a bank account in the name of my new LLC but this has created a number of stumbling blocks. I’ve setup new account for myself in the past and they were indeed effortless and fast but so far, trying to do the same in my business name has been a bit of a headache.

    I initially got an email back stating I needed a bunch of additional documents and after submitting them, I have yet to hear back. My question is, what sort of liability would I face if I were to use a separate bank account in my own name purely for business as opposed to one in the name of my LLC? Alternatively, how ill-advised would it be to use said account until I had the business account, and then transfer the money? In both cases, I am speaking from the perspective of setting up an account to receive funds from Kickstarter.

    Any input is appreciated!

    1. Richard: I’m sorry to hear you haven’t heard back from your bank. From what I’ve been told about this subject, it doesn’t matter in the eyes of the IRS or the law as to the structure of your bank account, as long as your personal and business finances are in separate accounts. The account I use for business is technically a “personal” account in the eyes of the bank, but in the eyes of the law I only use it for business, so it’s a business account.

      I would not recommend mixing funds in the same account for any period of time, just because it causes complicated accounting later.

      1. Thanks for getting back to me. I actually meant, opening a NEW personal account and using that until the normal business account becomes available. Or if the personal account works, is the business account even beneficial at that point? The reason I was pursuing a business bank account was just in case any legal issue came up. Hopefully that never becomes a problem but I would rather fall on the side of caution. I’m just feeling a little frustrated because I didn’t anticipate that opening a bank account would be the roadblock to mess up my project schedule.

  38. Thanks so much for all of the really, really awesome and detailed information. It is really a blessing for new folks to have such a depth of detailed information on how to start down this path. I’m happy to have used your link for the Capital One account and look forward to continue digging into the info here on your site. Thanks!

  39. I realize that this is a really old post at this point – but one thing that Kickstarter creators should consider is what to do with all of the money sitting there until they need to spend it. Now – I’m not saying that they should go to the horse track or even invest in the stock market – but investing in short-term Treasury Bills is just smart business.

  40. Hi Jamey,
    I have a question about inventory and taxes. I’ve read that it’s best to do your kickstarter with plenty of time to produce and fulfill within the year to keep losses and gains together. Let’s say that my game funds, selling 200 copies and with the rest of the profit we produce an additional 300 games to later sell, breaking even on the kickstarter (This is to avoid a major flood of income all at once?). Are the 300 copies of inventory then taxable in the next year?

    1. Elle: While I like the idea of producing and fulfilling Kickstarter rewards within a reasonable amount of time, I wouldn’t recommend taking taxes into account for timing purposes–that creates an artificial constraint that may not be in the best interest of you, your backers, or your customers.

      The key to keep in mind is that you will report revenue and expenses related to the product in the year the product ships to customers. “Customers” may be KS backers, direct customers, retailers, and distributors.

  41. Hi Jamey, new creator here. Very interesting article. Thank you so much. Quick question on sales tax. Being in Florida, how do you handle sales tax to Floridian backers? How can i collect the tax for those backers located in FL ? Let’ say i have a $200 pledge. How do i add the 6% sales tax to FL backers?

  42. Hi Jamey, very helpful content! Thank you. My partner and I are just getting ready to launch our kickstarter campaign. We are trying to avoid any surprises. Is there a list of potential expenses you could share to help us be better prepared before launching our new product? Here’s a link so you can take a look at our product. http://www.smartKaKoon.com

    1. LaQuanda: Thanks for your question. One of the most important aspect of a Kickstarter project is proper, accurate budgeting (KS fees, advertising, personnel, manufacturing, freight shipping, and fulfillment). I’d recommend reading this: https://stonemaiergames.com/7-insights-missed-by-most-first-time-kickstarter-creators/

      And these:

      https://stonemaiergames.com/kickstarter-lesson-7-the-funding-goal/
      https://stonemaiergames.com/kickstarter-lesson-117-the-3-funding-scenarios-you-must-plan-for/

      And, of course, if you haven’t already read them, these: https://stonemaiergames.com/kickstarter/full-list-chronological/

  43. I have two questions! I ran a campaign while working for a Swedish company and in order to have it as a $-based campaign, I was the official creator and the money went to my US bank account and I then transferred it over the Swedish company. I understand that I’m still considered to have received that income and must therefore pay taxes. However, is there anyway to deduct money due to the fact that I transferred it to the Swedish company?

    The campaign brought in about 27,000 USD, but about 7,500 of this were donations that didn’t receive anything in return, so, as I understand, can possibly be considered “gifts” and not income. Furthermore, many surveys were not filled out, so they didn’t receive a reward and many of the rewards were not worth what was donated for them. Can I take these amounts out of the gross income for my federal taxes and if so, where do I account for it, or where do I put the gross income amount after taking out the donations that are considered “gifts”? Do I simply reduce my gross income, even though 27,000 is reported on the Stripe form, or is there another section of the 1099-K form where I can deduct these amounts?

    Hope these questions make sense!

    1. “However, is there anyway to deduct money due to the fact that I transferred it to the Swedish company? –I have no idea. :) Have you asked an accountant?

      “Can I take these amounts out of the gross income for my federal taxes and if so, where do I account for it, or where do I put the gross income amount after taking out the donations that are considered “gifts”? Do I simply reduce my gross income, even though 27,000 is reported on the Stripe form, or is there another section of the 1099-K form where I can deduct these amounts?” –I’m really not sure on this either, but hopefully an accountant will know!

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