|Tax law and my website|
How and when I need to get a license or incorporate my website
I run a small browser based role playing game site.
We make a small amount every month, enough to pay for hosting and advertising with some left over.
We are planning a larger launch in the Fall that may result in up to 5x the users we have now and possibly 5x the income.
There is just me and my coder, equal partners. I'm the business/design/game manager and he is the coder.
At the moment all income from the game is going back into the game, as well as being saved up as capitol for the coming launch. So I am pretty sure it just qualifies as a hobby as long as I do that.
However, after this major launch I would like to start making some personal income, my partner as well. Most likely something like 50% of net income being divided between us every month or quarter.
But I will have need to claim that income, right? How do I do that?
I think I claim it as part of my personal tax return, but I'm not sure how, or if that is right.
If you know what/how or can point me toward a good resource I would be very appreciative.
Thanks in advance for any help.
You will have to tell us where you live I'm afraid! Tax and corporation law varies massively between countries, and even parts of a country.
Oh, yes, sorry.
I am currently in Pennsylvania, USA. I am in college and will most likely be moving in the future, so I would prefer an option that didn't require any possible future complications, like having to return to PA for any legal issues. Or filing PA taxes while I live elsewhere.
Looked into LLC's and know I can pretty much make it in any state, but I think thats still a long ways away for us and our game.
The game's user base is pretty international. We have users from every continent but Antarctica :)
If your income right now is over $600 a year I believe you have to report it. Since you are not incorporated, you actually cannot deduct your expenses as you are claiming. That is a benefit the IRS only gives to businesses.
You should definitely talk to a tax advisor.
|So I am pretty sure it just qualifies as a hobby as long as I do that. |
No, the IRS qould qualify it as a hobby if you are not running it as a serious business (among other criteria). If it is classified as a hobby, you would not be able to claim a loss from it (if your expenses are more than your revenue). Whether or not it's a "hobby" or "business" you still need to report your income to the IRS.
|Since you are not incorporated, you actually cannot deduct your expenses as you are claiming. That is a benefit the IRS only gives to businesses. |
Compeltely wrong- you do NOT have to incorporate to claim deductions. You use Schedule C if you are not incorporated.
|The game's user base is pretty international. |
No relevence- as a U.S. citizen you are taxed on all your income reguardless of the source or location of the source. If you have bank accounts in other countries that people are paying into, you also have additional reporting obligations.
|We make a small amount every month... |
Who is the "we" to which you refer? Is it you and your spouse or you and one or more partners? If the latter, you DEFINITELY need to look into setting up something legit (whether a partnership, LLC, or incorporating), especially if you are planning to grow in the future. Not just for tax issues, but also legal issues to protect yourself in when a major disagreement arises.
|If you know what/how or can point me toward a good resource I would be very appreciative. |
I would recommend buying a few of the books by Nolo Press on taxes and business structures for small businesses. Even if you just look at their web site they have a lot of the basic information there for free. They have a book just on partnerships which is what I think you have now, but ideally it is usually best to have a business structure with limited liability. That way if you get sued your personal assets are generally not at risk.
Buying several of the Nolo Press books was one of the best investments I made when starting my business. Plus the cost of the books may be tax deductible.
|Compeltely wrong- you do NOT have to incorporate to claim deductions. You use Schedule C if you are not incorporated. |
Absolutely, especially if you're putting your profits back into the business. Keep good records of every expense related to your site. On Schedule C, you list how much you made and subtract how much you spent (or vice versa). The kicker is that if you spend more than you make, the loss is subtracted off on your 1040. (Assuming things haven't changed within the last few years.) Do the research suggested, though, to find out what's considered a legitimate business expense and what isn't, and how to handle different types of expenses - there are some practices that the IRS uses as flags for audits. Again, keep records on everything.
If you're making money - or even if you're trying to make money, it's not a hobby. But that's a good thing. You can't deduct hobby expenses!
|like having to return to PA for any legal issues. Or filing PA taxes while I live elsewhere. |
I am not sure you can avoid this unless the business was incorporated in the state you plan to live in. However I am not a CPA so you should talk to one, but my understanding from my own business is you are always responsible for the state (and possibly local) taxes that a corporation, LLC, or partnership make in the state it is set up in. In addition, you are responsible for federal and possibly local taxes both where the business is at and where you will live in the future.
This isn't necessarily a bad thing, but it is extra paperwork you need to maintain, but hopefully the extra income you are making would be an incentive to keep all of this paperwork and keep the business regardless of where it is located.
However one HUGE piece of advice I would give since you mentioned you had a partner is definitely incorporate in some form, i.e. LLC or Corp. and make sure you have a fully written partnership agreement that details EXACTLY who is responsible for what, how the money will be divided and re-invested, and remedies for dissolving the company if things don't work out. I have many nightmare stories I can tell you about partnerships that went bad even though everyone "were friends" when it was formed. A written partnership agreement will be worth its weight in gold in the future if a disagreement occurs and will save you a ton of heartache. See both an attorney and CPA about having this drafted.