The Kickstarter Effect-Frontloading the Developement?

[Streamlock]

I had read from a couple developers that previously, any money collected from kickstarter donations not spent by the end of the fiscal year are considered 'profits' from a taxation standpoint (in the States at least) and as such is treated as taxible buisness income.

 

I had also heard some rumblings that in Washington they were considering passing legislation to treat crowdsource funding as a sort of investment, and give exclusions to such taxation until actual sales/services are rendered.

 

As it applies to PE, will that force to 'frontload' a lot of the dev work in the 1st year to avoid....that is the wrong word, 'utilize' the current tax code in such a way to make the most out of raised funds? Music, art, sound assets, any farming that needs to be done?

 

I guess I'm seeing a scenario where that to make the most use of available funds, discissions have to be made early that may or may not mesh well with a traditional 2 year+ game dev cycle. Dunno though, not an expert myself.

[JayDGee]

KS funds should absolutely be considered investment capital for tax purposes because that's exactly what it is.

 

If it does become a case of use the money or the taxman steals it, then I guess all parts of development could begin earlier instead of the team gradually increasing in stages.

This has its merits and flaws.

[Darkpriest]

I'm fairly sure that it won't be taxable, because:

 

a) The fund raise has obligations attached, which need to be fulfilled

b) There was no "sales conditions" met per US GAAP

c) It's not a donation, see point a)

 

IMO it's a cash inflow with a liability attached, purely a BS (Balance Sheet) transaction. Basically until they will have a product ready, all their transactions will be mostly BS related, including salaries for the production team members (which will be later recognized as CoGS) - At least that's my assumption. I did not work in game industry and perhaps there are some interpretations of Accounting rules specific to that industry, that I am not aware of.

 

In short, the cash inflow from KS SHOULD NOT be taxable. Unless there are some legal conditions in KS agreement that treat the fund raise as a donation from a tax related perspective, it should be safe.

 

EDIT:

 

I treat KS as a fund raise with obligations, because donation would mean that we have no control over the use of money, and KS obligates the beneficiary to use the funds to deliver a promised product. There is a chance that we might not see the product, but it only has no legal repercussions for the beneficiary of the fund raise, if he used all the money from the fund raise on the delivery of the project but it felt short on cash to complete it or other unpredictable conditions arose.

Edited November 1, 2012 by Darkpriest

[Streamlock]

I have no idea really, from just a quick job on the interwebs, this is from Forbes....

 

"In basic terms (and this certainly doesn’t constitute tax advice!) if you spend all the money you raise on producing your reward items within the same business year, then your tax liabilities would be reduced. If you don’t manage to buy all your bits and are left with a surplus at the end of the your financial year, then tax could take a sizeable chunk of it, leaving you with less to spend on your project." On the subject of Kickstarter fundraising.

 

Also...."in 2011, Kickstarter started filing crowd-sourced funds as taxable income. Amazon (Kickstarter’s payment processor) files a 1099 on your behalf to the IRS– so the IRS definitely knows about the money you’re making, and counts it as income."

 

that information is a year old or so though.

[alanschu]

IMO it's a cash inflow with a liability attached

 

Why is there a liability attached? Is the obligation enforced? How is it monetized? What restrictions are there from stopping someone from raising several million dollars and putting out a hack game that required only a fraction of the cost.

[Osvir]

Oh bureaucratic society system <3

 

"Quick! Someone is getting money! Deny! Denyyy~!!"

 

I don't understand why it would be taxed, at all. If I pay my friend to build a chair for me, I pay up front and he delivers a chair to me (in time).

 

I've avoided these discussions because, I don't understand the whole tax deal... why tax? Tax when they've got a full product that they are selling in stores to everyone who didn't pay for the creation.

[Marceror]

I remember Feargus stating on the KS comments page that they'd be doing some fancy accounting stuff to avoid getting taxed for all of this money this year. The will likely defer receipt of much of it until they need to spend it.

[Hiro Protagonist II]

Feargus mentioned in the KS comments that the KS funds are taxable and they'll have to speak to their accountant on how they'll manage the funds. I'm sure they'll be trying everything to legally minimise any tax as any responsible company would be doing. As a famous person once said, "if anybody in this country doesn't minimize their tax they want their heads read".

[Nefastus]

I had read from a couple developers that previously, any money collected from kickstarter donations not spent by the end of the fiscal year are considered 'profits' from a taxation standpoint (in the States at least) and as such is treated as taxible buisness income.

 

I had also heard some rumblings that in Washington they were considering passing legislation to treat crowdsource funding as a sort of investment, and give exclusions to such taxation until actual sales/services are rendered.

 

As it applies to PE, will that force to 'frontload' a lot of the dev work in the 1st year to avoid....that is the wrong word, 'utilize' the current tax code in such a way to make the most out of raised funds? Music, art, sound assets, any farming that needs to be done?

 

I guess I'm seeing a scenario where that to make the most use of available funds, discissions have to be made early that may or may not mesh well with a traditional 2 year+ game dev cycle. Dunno though, not an expert myself.

 

Definitely not an expert, but for a company like Oblivion who is probably not teetering on the brink financially and, would it matter? If it's treated as front-loaded taxable income, then wouldn't the production debits in the following fiscal year would be deducted and they would save in taxes in the second year about what they lost the first?

[Darkpriest]

IMO it's a cash inflow with a liability attached

 

Why is there a liability attached? Is the obligation enforced? How is it monetized? What restrictions are there from stopping someone from raising several million dollars and putting out a hack game that required only a fraction of the cost.

 

There is an obligation to deliver a product which is pitched in the KS and to which you raise the funds.

 

From what I understand from KS mechanics it is.

 

The third one is more tricky, but basically a production budget with stretch goals + estimated cost of the rewards could be a proof for the value of the obligation

 

Lastly, if they can deliver a product with the fraction of the funds they gathered then that will be their profit AFTER the products, which create liability to benefactors, will be delivered to supporters.

 

I am no US Tax specialist, so if you know the rules better, I'd be grateful to look into the reasoning why would this be treated as a taxable income.

Edited November 1, 2012 by Darkpriest

[Osvir]

All of these money money from the crowdfunding. It is the crowd that is funding the project, the crowd is paying the taxes (not Obsidian).

 

EDIT:

Pay for what you want and need, without Government involved, isn't Kickstarter opening up the idea of this ideology?

Edited November 2, 2012 by Osvir

[Jymm]

I'm not sure KS can be distilled to a binding contract. The line creators get about requirement to fulfil projects is pretty slim. In order for an accounting liability to exist they would have to be able to value up all the expected rewards and put that on the books. Its clearly not an equity stake because Kickstarter makes it clear you get no ownership in the product. So it would have to be a cash asset with a liability to deliver the reward tiers. What about things like the reward to play D&D with Obsidian staff? Their cost to deliver on that is near zero. So is their cost to deliver on naming an Inn for you. I'm guessing for tax purposes they have to treat it more like a donation, and its not going to a tax exempt 403c, its going to a taxable corporation.

 

Where's a tax accountant when you need one?

[alanschu]

There is an obligation to deliver a product which is pitched in the KS and to which you raise the funds.

 

From what I understand from KS mechanics it is.

 

The impression I get is that Kickstarter will avoid responsibility in the event of disputes: Link.

 

From the Kickstarter FAQ:

It is the responsibility of the project creator to fulfill the promises of their project. Kickstarter reviews projects to ensure they do not violate the project guidelines, however Kickstarter does not investigate a creator's ability to complete their project.

 

Are developers legally obligated to complete their project?

Yes. Kickstarter's Terms of Use require creators to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill. (This is what creators see before they launch.) We crafted these terms to create a legal requirement for creators to follow through on their projects, and to give backers a recourse if they don't. We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill.

 

My best guess would be that you'd have grounds for a class action lawsuit.

 

 

Some other concerns:

is over funding good?

Haunts: The Manse Macabre

 

 

I'd hate to see the Haunts guys sued or anything. Sometimes crap happens and it sounds like it did for them

 

 

I am no US Tax specialist, so if you know the rules better, I'd be grateful to look into the reasoning why would this be treated as a taxable income.

 

I'm not either (I don't even live in the US), but I imagine it's a heck of a muddy water territory with projects that are overfunded. Say you ask for $100,000 and you end up getting $10 million!. Even if you need to use a significant chunk of that to deliver rewards, there's no way that that company is giving those awards away at cost. Is this not effectively fulfulling preorders and effectively just a different type of selling? For many people (myself included), I contribute because I'm getting something in return.

 

Kickstarter also requires an applicant's tax information (created via Amazon) in order to create a kickstarter account to start projects.

 

 

I think it's best to go into Kickstarter with money that you are perfectly okay with never seeing any return from ever again. IMO I understood all the risks with backing something like PE and WL2, and understand that my contribution may never amount to anything material.

Edited November 2, 2012 by alanschu

[rjshae]

KS funds should absolutely be considered investment capital for tax purposes because that's exactly what it is.

Financial investment requires an expectation of gains. I had no such expectation. Sales taxes seem more appropriate, since we're receiving a product in exchange.

[Sensuki]

Time for some Swiss Bank Account action IMO

[ilhdr]

bahamas here we go!

[Utukka]

I think a few people missed the part where KS reports what you raised to the IRS automatically. Tax dodge chance = 0

[Sensuki]

I also think a few people (myself included) are joking.

[Darkpriest]

There is an obligation to deliver a product which is pitched in the KS and to which you raise the funds.

 

From what I understand from KS mechanics it is.

 

The impression I get is that Kickstarter will avoid responsibility in the event of disputes: Link.

 

From the Kickstarter FAQ:

It is the responsibility of the project creator to fulfill the promises of their project. Kickstarter reviews projects to ensure they do not violate the project guidelines, however Kickstarter does not investigate a creator's ability to complete their project.

 

Are developers legally obligated to complete their project?

Yes. Kickstarter's Terms of Use require creators to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill. (This is what creators see before they launch.) We crafted these terms to create a legal requirement for creators to follow through on their projects, and to give backers a recourse if they don't. We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill.

 

My best guess would be that you'd have grounds for a class action lawsuit.

 

 

Some other concerns:

is over funding good?

Haunts: The Manse Macabre

 

 

I'd hate to see the Haunts guys sued or anything. Sometimes crap happens and it sounds like it did for them

 

Well, these two points for me apply the obligation on the KS pitcher (in this case Obsidian) to deliver the product to the crowd that funds this project. We are not anonymous, but I might see a point where this can be a bit muddy. (for example at no point there was an official ID verification, which usually is required from the legal perspective)

 

I am no US Tax specialist, so if you know the rules better, I'd be grateful to look into the reasoning why would this be treated as a taxable income.

 

I'm not either (I don't even live in the US), but I imagine it's a heck of a muddy water territory with projects that are overfunded. Say you ask for $100,000 and you end up getting $10 million!. Even if you need to use a significant chunk of that to deliver rewards, there's no way that that company is giving those awards away at cost. Is this not effectively fulfulling preorders and effectively just a different type of selling? For many people (myself included), I contribute because I'm getting something in return.

 

Kickstarter also requires an applicant's tax information (created via Amazon) in order to create a kickstarter account to start projects.

 

 

I think it's best to go into Kickstarter with money that you are perfectly okay with never seeing any return from ever again. IMO I understood all the risks with backing something like PE and WL2, and understand that my contribution may never amount to anything material.

 

Yes, we are ok. with the money to not be returned if no fraudulent action took place with the money we threw at the project and the contributor of the fund raise can give a solid proof that all the money went on the production process of the said project.

 

It is... quirky... but I believe that a complete budget document, that documents all the planned production costs plus rewards costs in order to deliver the pitched product to the backers, would be enough in terms of proof. Unless there would be some unusual expense categories (i.e. too big variation from the usual market price), that should be fairly solid.

 

Per the obligation (as I understand it) set forth in the KS, they cannot put the extra cash as their pure distributable income, that would boost their bottom line and as a result could also be part of a dividend payout if they did nothing in their current fiscal year.

 

Again, perhaps the US Tax rules have some special rules for such situations, but I think that it may be a simple money grab by the IRS, because I do not think that any KS pitcher would spend thousands of USD for top tier tax advisory. I've learned that a good documentation and reasoning can get you through a lot of so called "muddy waters". The KS and Amazon already take a lot of money as it is

 

Of course the extra leftovers from the fund raise should be a subject to a tax, but only when the obligations towards the backers would be met.

Edited November 2, 2012 by Darkpriest

[alanschu]

See this is where I get worried.

 

Who is the arbiter of whether or not Obsidian met their obligations? If the game is delayed, does Obsidian need to worry about a rowdy crowd that doesn't have their game yet? When dealing with claims such as "the spirit of the IE games" then what exactly does that mean? (About the only thing forum goers can agree on is that it should probably have an isometric viewpoint)

 

Since cost is strongly correlated to time in game development, are fans going to be understanding if some of the stretch goals have to be cut? Is it okay if it's only a 14 level dungeon? 10 level? 5 level? Or rather, will fans be justified in pursuing some sort of action? (though I doubt they will, at this point I'm mostly just musing).

[AwesomeOcelot]

See this is where I get worried.

 

Who is the arbiter of whether or not Obsidian met their obligations? If the game is delayed, does Obsidian need to worry about a rowdy crowd that doesn't have their game yet? When dealing with claims such as "the spirit of the IE games" then what exactly does that mean? (About the only thing forum goers can agree on is that it should probably have an isometric viewpoint)

 

Since cost is strongly correlated to time in game development, are fans going to be understanding if some of the stretch goals have to be cut? Is it okay if it's only a 14 level dungeon? 10 level? 5 level? Or rather, will fans be justified in pursuing some sort of action? (though I doubt they will, at this point I'm mostly just musing).

 

From my experience most backers are very understanding. A KickStarter game failed recently and only 2 people wanted their money back. The delivery date is clearly stated as an estimate. Obsidian can't just arbitrarily cut stretch goals, but if they make an honest attempt and fail then people would not be justified in pursuing action. The spirit of Infinity Engine games is entirely up to Obsidian. Obsidian have been very clever with their stretch goals, 15 levels of a dungeon seems a lot, but the levels can be as big or small as they want, there's a lot of room for maneuver for Obsidian.

[Darkpriest]

See this is where I get worried.

 

Who is the arbiter of whether or not Obsidian met their obligations? If the game is delayed, does Obsidian need to worry about a rowdy crowd that doesn't have their game yet? When dealing with claims such as "the spirit of the IE games" then what exactly does that mean? (About the only thing forum goers can agree on is that it should probably have an isometric viewpoint)

 

Since cost is strongly correlated to time in game development, are fans going to be understanding if some of the stretch goals have to be cut? Is it okay if it's only a 14 level dungeon? 10 level? 5 level? Or rather, will fans be justified in pursuing some sort of action? (though I doubt they will, at this point I'm mostly just musing).

 

This is where transparency of the company's development process comes to mind. If I am left with the feeling that everything is going well and then in mid 2014 I get a message that we are running out of funds and we are half-way through, then I would start be suspicious about the actions taken by the developer. If however during the development cycle there will be transparency about stages of development, I have no problems with the product getting delayed or even reasonably cut of some features that turn out to be too expensive and would significantly exceed the budget limits.

 

The prime condition is this - use the fund raise ONLY to the PRODUCTION of the title, which will meet the obligation of delivery of pitched product. The Key features which have to be in the product are on The KS pitch - including the stretch goals. Everything else is a subjective expectation of each of us, but it does not mean that it has to be met from my perspective, as long as it delivers the features set forth in the KS pitch. If I will feel unsatisfied, I will simply be more cautious with the future funding, but at no point I will be able to claim that the product did not deliver the features that were mentioned in the pitch...

 

It will be like in case of pre-ordered Bioware games - I cannot say they have no features that were promised, I can only be disappointed because the delivery of features was not as I was expecting them to be.

 

EDIT:

 

As per tax issues, perhaps they can document the raised funds in the "Restricted cash" category? Maybe that can help in documenting that as a non taxable item, until delivery of products? (with the liability on the Balance Sheet)

 

Nature of Restricted Cash

• Restricted cash arises out of a management decision to set aside funds because of, say, a legal obligation such as a statute or court order, or based on contractual requirements. For example, a company could elect to set aside a certain amount each month for the repayment of debt. This cash would be considered restricted and available exclusively to extinguish the debt. A company's earmarked cash would be aggregated to calculate the total restricted cash balance.
  

Edited November 2, 2012 by Darkpriest

[Aeristal]

I would guess that one of the two that I can think of right now and there are probably several ways of dealing with the taxation issue would be to fully document and journalize all transactions that occurred through paypal and ks and mark it as a liability.

 

I used Wikipedia but eh.. don't feel like looking it up in my principles of accounting book. It works.

 

Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1.) and (2.) are met.

1. Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash.
    
   
2. Revenues are earned when such goods/services are transferred/rendered. Both such payment assurance and final delivery completion (with a provision for returns, warranty claims, etc.), are required for revenue recognition.
   

Just use revenue recognition rules of GAAP, they can't realize it as profit until revenue recognition rules are met.

1. Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery.
    
   
2. Revenues from rendering services are recognized when services are completed and billed.
    
   
3. Revenue from permission to use company's assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used.
    
   
4. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place.
   

 

 

In such a way, Obsidian could break down KS and Paypal into two separate blocks of entries. One could be recognized and delivered this year like an physical /virtual goods delivered this year-i.e. shirts, badges, forum titles KickerStarter Titles, NPC and Tavern development, and monetary value of entries into the in-game monument for 500 mark donators. The second block would then be recognized during the deliver of any physical / virtual goods upon game completion.

Edited November 2, 2012 by Aeristal

[Darkpriest]

@Aeristal

 

I do not believe it is a matter of revenue recognition here, but more of the nature of the fund raise - i.e. is it a donation that is taxable or is it a cash inflow with obligations attached that would allow to treat these items as "restricted cash" and "liability" (which arises from contractual obligations).

 

The revenue recognition would apply if that was a pre-order - which is a bit different than what we have with the KS.

 

PS. I'd really like to see someone from US, who is actually working with US GAAP and US Tax on daily basis to get involved here I have a broad knowledge of US GAAP, but it is certainly not my main focus.

Edited November 2, 2012 by Darkpriest

[Aeristal]

Here is another explanation got from, http://74.6.117.48/s...pA_sGkAPBJpsQ--

 

For the use of Accrual based accounting and from a CPA commenting on Tax Accounting for KickStarter,

 

 

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 out there who gets Kickstarter funds would not have to pay taxes on those amounts until the game is actually made and distributed to those individuals who pre-purchased it. This to me is so simple that if your CPA has not suggested it to you, I would recommend you find one who understands these principles.

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” with the first year’s expenses or the cost of those items (t-shirts, art, etc.).

Just in case those strategies don’t reduce or eliminate tax, there are two additional methods that you can use to further offset tax, as well as lower your tax bill when the game is distributed and eventually sold to the public.

 

@Darkpriest

 

I'd also point out restricting cash would still make it taxable income unless my aforementioned revenue recognition rules applied. If you were to ask an actual accountant, you would get multiple answers most of which lead to treating it as an investment, a liability, or purely income. The last of which is the most conservative/safest of options.

Edited November 2, 2012 by Aeristal