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Taxes

I'm not a CPA and this this material is for information purposes only. Hang tight, though, we are almost at the good stuff. Just need to get this last thing out of the way first.


CRITICAL Talk to your accountant

You’ll need an accountant anyway if you set up a company. Take the time to explain to them the whole crowdfunding thing and ask them about the taxes you’ll have to pay and whether there are any gotchas you need to look out for.

CRITICAL Accrual accounting

Accrual accounting means you pay your income tax not in the year you receive the funds, but in the year you fulfill your project.

Example: Your accounting is based on cash flow (not accrual) and your campaign ends in December. Let's say your project funded for $50,000 with the shipping and manufacturing cost being $40,000, but manufacturing doesn't start before April, next year. That means you cannot subtract your expenses from your income this year. This means you'll have to pay taxes on the $50,000 revenue, rather than on your $10,000 profit.

With your accounting based on accrual, you could pay your taxes next year, on the $10,000 profit, after you fulfilled your campaign. Be careful, accrual accounting has a 2 year limit on paying the accrued income. Unfortunately this kind of accounting is not possible in every country.

CRITICAL Offsetting taxes

As an addition to the previous point, if you need to offset your taxable income to next year (because you cannot pick accrual accounting or some other reason), you could pre-pay your manufacturer and maybe even pre-pay some postage, as well as paying outstanding designers before the end of the year. With a company, you can also book a liability for the unpaid manufacturing bill.

CRITICAL EU VAT

If you live in the US, you will either need to register for a VAT and an EORI number in an EU country (don’t need to register a business) or need to find an importer of record in the EU to handle your value-added tax (VAT) accounting. You just need someone in the EU, it doesn’t matter which EU country you fulfill your rewards from. Basically, the importer of record lets you use their VAT number so that you don’t need to register as a business in the EU. Fulfillment companies (mentioned in the Shipping section) take care of this.

State and city taxes for U.S. creators

If you are a US creator, please read Pay Caesar His Due

Artist royalty

Royalty payments (to a designer working on your product) might have different taxes associated with them based on what country you live in.

Tax thresholds

In most countries, there are thresholds in the tax system where your tax rates change. Be mindful of those in the chance that your campaign turns into a mega-project and funds for hundreds of thousands of dollars.

Notify your bank

This is just a precaution. There are horror stories about PayPal blocking accounts after the creators received a substantial Kickstarter funding, for fear of illegal activity. Just to be safe, you could notify your bank after the campaign, that you are about to receive an unordinary amount of money onto your account.

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