I am not a lawyer, so if you have any legal questions or need tax advice talk to a lawyer or an accountant. If you plan on raising funds through sites like Kickstarter, it’s worth your time and money to know what you’re getting into, so having said that, here’s what I did.
About a week ago it dawned on me that I shot the first page of the script in February with the intention of launching the Kickstarter in March. It’s now June. There are only six months left in the year.
Then it hit me.
The Kickstarter, which hasn’t launched yet, will probably run 30-40 days.
Five months left in the year.
It takes Amazon about two to three weeks to process payments.
About four months left in the year.
We ball-parked the film to be about 15-20 shooting days depending on how much we end up raising. So without having any pre-pro done as far as scouting, or casting, would we have enough time to actually shoot the film by the end of the year? Do we want to shoot in November or December? The story does take place in the winter, but do we really want to shoot in a Chicago winter?
Then it really hit me: If I don’t shoot the film this year, how much of the money raised goes to the IRS for taxes?
The answer is $13,750 plus 34% of the amount over $75,000. So if we raised exactly $100,000 and we had zero expenses (we would but the vast majority wouldn’t be spent until we shoot), then the federal tax burden would be: $22,250.
$13,750 + $8,500 (34% of $25,000 – the amount over $75,000).
So out of the $100,000, we’d be left with: $77,750.
Actually we’d be left with about $70,000 because Amazon/Kickstarter take about 10%.
That’s a lot to lose to taxes when if we shot all in the same year, it would basically all go towards expenses and our tax burden would be minimal, if any at all.
I reached out to someone who had a very successful Kickstarter, which ended well over a year ago, sothe tax burden on his successful project would have been due by now. He responded saying it was a mess, and that they were looking for some way to classify the Kickstarter reward as “gifts” which aren’t taxable.
See normally when you’re raising funds for your business, it’s considered “contribution to the capital” of the business and of course is not taxed. Kickstarter however is classed as income, and you are issued a 1099-K.
So what should I do? Should I delay the start of the Kickstarter so that it ends say in January 2013, receive the funds in February 2013, pre-pro for a few months, try to raise some other private equity and then shoot in the summer? Or the fall? I could, but I want to launch this thing, soon, not wait six months.
So here’s what we did.
We formed a corporation. A C Corp to be exact so that we could adjust the fiscal year. An LLC is simply a pass through entity, which adheres to your tax year (the calendar year almost exclusively). An S corp is similar and doesn’t allow the fiscal year adjustment. A C corp allows the fiscal year change. So we could form the corporation in June, set the fiscal year as July – June, which would give us the ability to shoot by June of next year, and expense most of the funds raised prior to the tax burden being owed.
So we did that.
Hollow Point Films, Inc formed June 22, 2012.
Jack Marchetti, CEO
Hollow Point Films, Inc.
Should I get business cards which read “I’m CEO bitch” – maybe if I had any semblance of a revenue stream. For now the corporation is simply being used for tax purposes and liability protection.
I went through a lawyer to form the corporation instead of going through a site like Legal Zoom mainly because the lawyer only costs about $300 more and I’d at least have some real advice from a lawyer, not just a website.
So if you’re interested in running a Kickstarter, keep in mind the tax burden and plan accordingly.
If your campaign ends in December, then you’ll immediately owe taxes on the amount raised if you don’t spend it by the end of the year.
There are some exceptions to this. If you’re raising less than $20,000 or have less than 200 backers (transactions) than you won’t receive a 1099.
Aside from my fiscal year change, you can also use the Accrual Accounting method which only counts income when it is earned, not when it is received.
Again, I’m not a lawyer, nor am I an accountant. It’s possible there was a much better, simpler way to handle this, but this is what I did.