Monday, December 29, 2014

My Dog Ate My KS Funds (Part 2 of 10)

2:  Income tax & profits

     In the United States of America, income received is taxable.  Not gross sales, but income which is based on profits for the year.  Profits are dollars received (gross sales) minus expenses paid (written off) and some other factors too. 

     Expenses should be written off in the tax year the crowd funded project ends.  Most expenses for miniature crowd funding projects include mold work, metal ingots, sculptures, crowd funding fees, packaging material and shipping charges. 

     If a project raises funds and the end product does not ship in the same year, then additional expenses such as shipping charges for example, will have to be written off in the following fiscal year.  Unfortunately, higher taxes will be owed the year the crowd funded project ends and possibly more shipping expenses too as rates tend to increase from year to year.

    Let’s break down the costs per basic pledge using my KS as an example.
$30 pledge for customers in the USA = 20 miniatures plus stretch goals and free shipping.

Metal costs by weight = $ 7.50
Zip baggies to organize contents x 11 = $  .55
Plastic bases x 25 = $  .75
Printed invoice and shipping label ink/paper = $  .05
10% KS took when project ended = $3.00
Shipping charge online = $5.20
Chipboard boxes x 2 = $  .32
Packaging tape = $ .10

Costs = $17.47 against a $30 pledge in the USA is a potential profit of $12.53

     I can now apply that profit toward other expenses not listed such as molds and sculptures.   I conduct business as an S-Corporation which means I'm self-employed, my time is not a factor in the eyes of the IRS, just my expenses, with my end profit for the year equaling my personal income. 

    Here are two examples of how expenses for a project spent in the same and different year can affect profits and put a crowdfunded project in jeopardy.   

Example 1 (Same year):   In 2014, you take in $10,000 and your expenses are $5,000.  You pay income tax based on $5,000 profit ( 10-5=5 ).  Let’s estimate 25% income tax owed ($1,250) on the profit leaving you with $3,750 remaining.
Example 2 (following year): However, if half of your expenses are received in 2014 and the other half in a later fiscal year, you’ll pay more against profits.  This new example is $10,000 received and $2,500 in expenses for 2014, with an additional $2,500 in expenses in the following year ( 10-2.5=7.5 ).  Your profit for 2014 is now $7,500  x  25% and you owe the IRS $1,875.  That is $625 less that you have to work with for your crowd funding project. You'll still be able to write off additional expenses in the following year specifically for that year, but how easily the money evaporates from a project putting it at risk of completion. 

Scale the pledges up to $100,000 using example 2 and your looking at $6,250 less to work with and possibly a higher tax bracket of 28% or more.

Your tax bracket, or the percentage you pay the IRS on income depends on if you are filing as an individual or married couple.  Rates are available online, but change from year to year.  Again, if you finish the project in the year the pledges end,  you'll know the tax bracket percentage, exact shipping costs, and your budget will be sound. 

Pledgers:  Watch out for projects that are scheduled to ship in the following year.    

Crowdfunders:  Start your project off early in the year to generate as many expenses against your gross sales so you can reduce any amount owed to the IRS.  A project that breaks even or takes a loss could mean no money owed and possibly a refund. Consult an accountant to see what type of business you should file under that would best benefit you. 

Next week:  Metal vs. Resin

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  1. Hey mate! You can check as there are options for deferring revenue until the goods are delivered to the customers that allow you to move the profit into the same 'future' year as the shipping costs. This lets you put the tax burden in the appropriate year. The accounting and requirements are more complex but it is a nice tool to use. Cheers! :)

  2. Thanks, Mr Borg and Wargamer43210; this is all interesting stuff.

  3. When I talk to my accountant in a month, I will ask about the process of deferring revenue and post the findings here in the comments section.

  4. My accountant suggested that anyone who wants to "defer revenue" consult a CPA Attorney because you will be dealing directly with the IRS for negotiations. Certainly an option, but the attorney is not going to work for free and most likely the billing for the service will not come cheap. I then consulted a customer of mine who teaches business tax law at three universities who has 40 years plus experience and he suggested the same thing.