10

I'm creating a KickStarter to raise enough funds to take 3 months off from my full-time job and finish an iOS game that I've been working on for about 3 years now. Put simply, all I need is about $35,000 (after KickStarter and Amazon fees, taxes, and paying for backer rewards). $35k will cover everything my income normally would--health insurance, house, car, bills, etc.--and allow me to invest some in equipment, legal, accounting, etc..

I've been reading that, if I choose to file as a sole-proprietorship or as an LLC, I'll have to pay federal and state taxes just as if it were income from my primary employment. As far as I can tell, this means I should account for taxes being in the area of about 35% of the TOTAL amount raised via the KickStarter.

KickStarter takes 5% of the total amount raised as their fee. Amazon takes the same. That's another 10% gone, right off the top.

After all that, I'll still need to cover the cost of backer rewards out of whatever's left.

Then, once all that has been accounted for, I'll have whatever's left over to invest in equipment and pay my bills and feed my family for 3 months.

On any given day, you can find dozens of KickStarters where developers claim they can make an iOS game for $5000, $10,000, and some for even less. It makes me think that these guys must be coming up with a number that just "sounds good" and throwing a KickStarter up.

All of the above is to give you a background on how I've come up with the numbers below. Am I doing something wrong?

Let's say I start my goal at $230,000. (Wayyy more than I thought I'd be asking for.)

Taxes should be in the area of 35% of that, which is $80,500.

230,000 - 80,500 = $149,500

The KickStarter fee (on the full raised amount of $230,000) is $11,500.

The Amazon fee is the same: $11,500.

$149,500 - 11,500 - 11,500 = $126,500

For each backer reward, I've marked up the donation tier by 150%. In other words, the actual, out-of-pocket cost of each backer reward makes up 40% of the total amount received for that reward tier. (If I pay $20 to have a shirt made and shipped to the backer, then I make that shirt available to backers who donate $50.)

So if I've raise $230,000, I'll have to give back $92,000 in backer rewards.

$126,500 - 92,000 = $34,500

So that leaves me with just a little shy of the $35,000 I need to pay for my expenses for 3 months...out of $230,000!

So, what do these $5,000 iOS guys know that I don't?

It seems to me that the only solution to lowering the overall funding goal is to raise the mark-up on each item to about 400%, about 5 times what the actual cost is, but that means asking $72 for a coffee mug, $200 for a t-shirt, and $300 for a hoodie. I fear that these numbers are just too high. Are any of these costs tax-deductible???

Any help you guys can offer would be much appreciated. Thanks.

By the way, I'm in California.

Chris W. Rea
  • 31,999
  • 17
  • 103
  • 191
baptzmoffire
  • 203
  • 1
  • 5

3 Answers3

8

You are wildly over-estimating your taxes. First, remember that your business expenses reduce your gross income. Second, remember that taxes are progressive, so your flat 35% only applies if you're already making a high salary that pushed you into the higher brackets of US and CA.

I think the deeper problems are: 1) you are expecting a super early start-up (with no finished product) to pay you the same as a steady job, including health insurance, and 2) you are expecting Kickstarter to independently fund the venture.

The best source of funding is yourself. If you believe in this venture and in your game design abilities, then pay for most of the costs out of your own savings. Cut your expenses to the extent you can.

You may want to wander over to startups.SE to get more perspective and ideas on your business plan.

Community
  • 1
NL7
  • 4,819
  • 17
  • 20
7

I think you might be missing something important here. If you are running a business, then any expenses that your business incurs are deductible.

Yes, Kickstarter would report the full amount. The IRS requires them to report everything that you raised. However, the Kickstarter and Amazon fees would be a business expense. Your cost on the backer rewards are deductible business expenses as well. Legal fees, accounting fees: deductible.

Money that you spend on equipment may not be deductible all in one year; you may have to depreciate it over multiple years. This is where the accountant that you are paying accounting fees to will come in handy.

People who do an iOS app Kickstarter campaign for $5000 might have a few things going on that you don't:

  • This might be just a hobby for them, and they aren't quitting a full time job to do it.
  • They might be writing a simpler app than the one you are attempting, so it will take less time.
  • They might have more modest living expenses. $35K for three months of living expenses seems really high.
Ben Miller
  • 116,785
  • 31
  • 330
  • 429
4

There's two big problems here and they are both related to the same thing:

  1. You are paying a lot of taxes
  2. Your monthly expenses are ridiculous at almost 12K per month

The last line says it all: you live in California. CA is a terrible state to do business in. the taxes on this money alone are crushing. Also, while I think you need to re-visit your budget and lifestyle, the cost of living is very, very high in CA and affecting your decisions.

Of course, all of this raises the question - if you can afford 12K in expenses each month, and I'm assuming you're the only source of income, then you should be able to afford funding your own game :D

PropositionJoe
  • 774
  • 8
  • 13