Tuesday, September 25, 2012

Crowdfunding & taxes: Lessons learned so far

Disclaimer: I'm not a tax accountant, I have only my own limited understanding of the German tax system (which might be wrong in places) and I advise anyone to confer with a professional tax accountant of their country of origin if serious advice about crowd funding and taxes is required. Nonetheless here's what I learned so far regarding crowd funding and taxes in Germany...

  1. Money generated from crowd funding is considered to be income. Plain and simple. Not a donation, a gift or whatever. Just plain old income. Which means that you need to pay income tax. Which - for the $90.000+ generated from the 'ADOM: The Resurrection' campaign is about 42+% in Germany. Luckily costs can be deducted before taxation if the costs accumulate in the year of the campaign. Which means that now I am in a big hurry to get the ADOM Lite RPG and the boxes finished as they - besides payroll - are one of the biggest cost positions by far. But it means that - whatever is left after all the costs - will be reduced by about 42% before it gets to my bank account.
  2. I learned something new that was quite a (bad) surprise. In Germany we have yet another tax called "Umsatzsteuer" (probably called VAT in other countries)... and it also applies. Umsatzsteuer is either 7% or 19% depending on your "goods" and from what I know it's 19% for computer games (which ADOM is). So 19% of your income from crowd funding (before costs - which hurts double!) will be paid as Umsatzsteuer (VAT), roughly one-fifth. Which is a lot. Luckily there is an exception: Umsatzsteuer seems to apply because you are regarded as a small business (which you are in Germany if you earn more than 17,500 EUR per year from said business). Luckily Umsatzsteuer is something that gets applied with a year delay - so if I had earned more than 17,500 EUR with ADOM in 2011 I would have had to pay 19% Umsatzssteuer for the crowd funding income. "Luckily" my ADOM income in 2011 was far below that so that I don't need to pay Umsatzsteuer in 2012. But I will have to pay Umsatzsteuer in 2013 on all income generated from ADOM (e.g. Google Adwords). Something to keep in mind for next year.
  3. Costs can be deducted before income tax as mentioned above. But the cost must be generated in 2012 - otherwise it doesn't apply. So we'll have to move a lot of work and other expenditures to 2012 in order to make them applicable. Otherwise taxes would be deducted first and only then could costs be applied which almost would halve the value of the funds.
That's all I learned so far, I'm pretty sure that some ugly surprises are looming on the horizon and I'll continue to report about it.

In summary: Be very careful if you estimate the costs for your project. There are many things that will reduce the final pledge amount, tax being one of the most important.

39 comments:

  1. So sad to read. Welcome to teh 21st century where the same oldschool rules doesn't comply with the new economy.
    Soon a crowdfunded project to support expenses of the previous one ?

    Keep up teh good work ! We are all supporting your project ;)

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  2. Damn those feudal lords; does it matter that the money was gathered from foreign individuals? can't you treat it as an service export instead of the selling of a product? in Colombia that brings certain important advantages.

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    1. No chance. I receive money, thus it's income. It doesn't matter how I generate the money unless it's for a charity. Which definitely is not the case ;-)

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    2. Not the case??? Saving world from corruption/ChAoS (or streamlining the process/UI) has to count. Time to start church of Ancient Domain of Mysteriology and exempt that... oh wait, in Germany even churches are taxed... scheisse

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  3. That is sad, indeed. Thomas, in EU if you pay VAT, you are eligible for 0% VAT, if you can prove that money you have earned are from outside of EU. Maybe that will help you, I'm not sure how Umsatzsteuer corresponds to VAT, might be the same.

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    1. 0% VAT only applies if you generate less than 17,500 EUR revenue. For that level you are exempt. Otherwise it applies.

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  4. I don't think income from a web-site should count as video game income. In fact I'm fairly sure the VAT should only apply against transactions for goods/services provided, which is not what's happening through your blog.

    Also according to this article exports to non-EU countries are VAT exempt:
    http://www.nrwinvest.com/Business_Guide_englisch/The_tax_system/Value_Added_Tax/index.php
    And according to this article if you're charging VAT you should have a VAT number in advance:
    http://www.tmf-vat.com/vat/german-vat.html

    But in general I think VAT is not something you should be worried about, as you're not providing a shop service.

    Income tax is harder to avoid, as you're unlikely to get the income classified as a gift with the different rewards on offer. I'd say it's definitely worth hiring an accountant to minimise the tax spent - they'll likely earn their fee and then some.

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    1. As I said: For this year luckily VAT doesn't matter. For next year there seems to be no way around it due to the small business case. At least my tax accountant (and it's the best in our city here) is 100% sure. I'll consider sending her those links but that again costs money ;-)

      But real life experience tells (contrary to what most people seem to think) that it's almost impossible to legally avoid taxes if you are not a multi-national company.

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    2. Ahh, so that is the solution. ADOM AG. :)

      Sorry man. I'm sure we'll all help in whatever way is possible.

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    3. Ah, well, I'd trust your accountant more than me and my googled links :) Sounds like Germany's tax laws are both stricter and less generous to small businesses than here in the UK :(

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    4. Absolutely. Having a small business probably is close to being in hell in Germany as you get taxed to death and the only certainty is that banks won't support you. Or the state...

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    5. Sometimes even a good accountant think formulaic. And in many case you need a fresh look you need a idea of how to think about it. In your case i dont think you cant say you sell something. We didnt pay mony for a game but give it to you. Maybe still you need to think about it like income, but not like a bussines income but you priveate income. When you finish game and you will sell it then it will be you bussines income but for now we didnt pay for game but give money to build idea. So i think this money should be counted like you private income. I dont know a tax law in Germany but in my country i need to think about many things for my accountant coz they really think formulaic in many case.

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    6. This is correct. We sent donations, not payments. They are to be taxed as personal income, and you shouldn't present them as anything else (unless it's, of course, the more economically efficient way).

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    7. @moozooh and dzrewian. I'm sorry, but it does not matter whether you though the money transfer as a donation, or a payment. The point of income tax is, that you pay it from your livelihood. That way, your livelihood, ie. your income, benefits not only you, but also the state, ie. the benefit of all the other citizen. Many charity associations don't have to pay tax from their donations, as it is seen, that their activities already benefit the the public.

      It is a sad thing, that the tax legislation is so slow to keep up with these new ideas, like crowd funding. We understand, that not all the 90 000 will be income to TB. Naturally he can use part of it to pay for his own work and I see no reason not to pay taxes from that. It's just that the ancient tax dragons have hard time comprehending the idea, that some person would pay income to himself. Unless you are the sole owner of a small business, which then pays you.

      Any way. All the best wishes to Thomas and the team! Try to get all the possible reductions during this year. When in peril, pay the guys their salaries for the next year in advance!

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  5. When you say "in the year of the campaign", do you mean you've got 12 months from the campaign to spend it? Because the way you're talking, it makes it sound like you have to spend as much as possible by the end of December. Which means that it's lucky we didn't wait much longer to run the campaign I guess!

    Reading about your Umsatzsteuer/VAT tax makes me mad. All of us who supported you in the campaign want to see you get some sort of reward out of your hard work, but it really looks like the government is doing a good job of not rewarding your entrepreneurship.

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    1. It's actually the calendar year. Small business are not permitted to separate business year and calendar year in Germany - another thing I learned. So, yes, receiving money at the end of December is a very bad idea.

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  6. Well, technically, the money is revenue, not income, until the end of the tax period (and then some in some places). Using it to cover business expenses or even to pay yourself back for unreimbursed expenses you paid out of pocket over the last year should defray the tax bill. Generally, I'd recommend that all crowdfunding projects have a business created before hand to deal with this. It's depressing how often I hear about indies self-funding a project for years and then getting knocked for a huge tax bill when they crowdfund.

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  7. I think you need some more tax lawyer opinions about whether it's taxable, whether it is in their jurisdiction, and then also what all of your options are for generating business expenses in 2012, and for carrying over expenses and losses from previous tax years into your 2012 tax accounting.

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    1. I already am using the best tax accountant available in my city :-) And yes, there is a little wiggle space... but much as long as you want to remain within the boundaries of the law. Which I definitely intend to do.

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    2. Now just need a wandering Tax Collector in the the wilderness.
      Not clear which starting city would be his home base.
      Perhaps both?

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  8. Wow, what awful news! What kind of terrible tax system takes ~50% of your earnings?! I wish you the best of luck through this, Thomas. I regret even more that I was late to the crowdfunding party and couldn't contribute.

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  9. So you're going to get taxed on this, and then your artist and programmer and composer are all going to get taxed again when you pay them with this money?

    Something doesn't seem QUITE right about that...

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    1. No, I get misunderstood :-)

      Money is taxed but once... but exactly once. Maybe for different reasons. Had I been unlucky VAT would have been applied but as I was kind of lucky this won't be tha case.

      Income tax will be applied... but paying others counts as costs which are deducted from taxable amount before applying taxes. So I can pay others before applying taxes but the other people are themselves responsible for caring about _their_ income taxes.

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  10. You could always set up a small business in a tax-friendly country, contract yourself out to that business for a very small sum and the income you receive is that contracted amount. So you pay your 42%(my that is huge) on that little income.

    Just a random thought.

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    1. As long as I'm living in Germany - according to my understanding - any money I generate is taxed according to German laws.

      And doing this afterwards is not possible in any case ;-)

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  11. Easy solution. Next time you see a dragon, drop all your money, then run around a corner (don't be in one of the eight primary directions from it, so it won't annihilate your money with its breath attack) and wait for the dragon to pick up your money. Kill the dragon and Voila-- your money is doubled.

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    1. The ancient tax dragon picks up the heap of 90000 gold pieces. The ancient tax dragon chuckles. The ancient tax dragon devours the 90000 gold pieces.

      But seriously, this sucks. Obviously the income tax applies to non-charitable donations, but how can they tax a one-time payment as one year's income but not recognize the costs of the multi-year project it pays for?

      Maybe it would have worked to put a foundation in charge of the funds and then pass the money on in annual sums. I have no idea, really.

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    2. Establishing a foundation - at least in Germany - is much more difficult than one would expect. And any non-charitable foundation gets taxed in any case on a yearly base at pretty decent levels. If such a foundation were to pay me that again would be income - which entails income taxes ;-(

      Checked that beforehand, too ;-)

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    3. Tax collector could pick up gold and grab it from PC like cutpurses, but unlike cutpurses, it would never drop it back :)

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  12. Wiki says that income tax in Germany is smaller for couples. Any income between 27k euros and 105k euros will be taxed at 24% rate for them.

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    1. Believe me...it's a lot more difficult. Tax can be smaller for married couples, but only if one part of the couple is earning a lot less than the other couple _and_ remains beneath a certain limit. Otherwise the differences between married/unmarried are negilible. Which Wiki is your source? What it says sounds pretty wrong as quoted :-)

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    2. Wiki says that income tax in Germany is smaller for couples. Any income between 27k euros and 105k euros will be taxed at 24% rate for them.

      Was that a proposal? :-P

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  13. Hey Thomas!
    Nochmal ein hinweis. Ich glaube es betrifft nur die Umsatzsteuer. Wenn ich es richtig verstanden habe musst du nur Umsatzsteuer auf sachen bezahlen, die von der EU stammen.

    Bei meinem geschaeft waren damals nur 12% von EU-Laendern da das meiste von der US stammte, weswegen ich kaum umsatzsteuer bezahlen musste.

    Solltest du abklaeren da es wirklich viel ausmachen kann!

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  14. Question about the VAT:
    I assume the tax is proportional to the 'value' part.
    How does that value get assigned?
    For example, the only thing of value added from the $50 level to the $75 level is a postcard signed by Sir Biskup.
    While it is a nice thing, it is by no means 'worth' 25 dollars. As a thing, it's a $1 postcard that takes 5 minutes to sign and process. Certainly Sir Biskup did not profit greatly by all the similar cards sent to him over the years.

    So the question is how does an accountant set the VALUE used in the VAT as distinct from the donation part?

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  15. So... they take half? Half??? I'm not well trained on fiscal matters, but that definitely seems like a chaotic act.

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  16. Thomas,

    Is there the equivalent in the German legal code of the Limited Liability Corporation (LLC)?

    In the USA, it is the equivalent of a hybridization of income tax and corporate tax, and is generally favorable for small business owners with relative large revenues. Basically rather than be a CEO, or hold a position in the company the owner's corporate income from the company is taxed as personal income. The advantage is you might be able to keep some of the money as assets within the company, and therefore spend it out as a reasonable pace, instead of spending it in a rush before the government taxes it (at least it'd be taxed at a lower, corporate rate, I think).

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  17. Should have sent the money to a Swiss Account and used a fake name....HA!

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  18. I had a small company some years ago when I was doing consultant work and I was able to set money I earned aside. I claimed it as costs next year instead of profits this year. Basicly in my book keeping we moved this amount from assets to the next years projected costs for equipment and materials I would need, but had no reason to purchase just yet. Naturally I had to make an official notice of this to the tax office with costs/plan of purchase, but money was saved from taxation. Next year I presented receipts etc as proof of costs for that project and all was fine.

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  19. Yes, I agree that in setting the target it is important to be careful. Crowdfunding taxes need to be considered before doing so. In general, tax provisions more or less come in the same ruling in most countries. From what I know, in general it is only the donation funding model that is tax exempted. But then again, it still depends on the place of the platform used. So, better check first crowdfunding law and taxes in different countries.

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