Publishing Insights: Taxes and Your Board Game Business


It's that time of year - March Madness! I mean tax season... We originally posted this article for the 2016 tax year but it is still just as pertinent today. If you read last year's article, read the "What's New" summary before deciding whether you need to read further. Otherwise, you might find it helpful to read the entire post.

Note: I am still working on our 2017 tax return. When I complete it, I'll edit this blog post to show the actual tax savings attributed to the "Overlooked Deductions." You can see our tax savings from 2016 here.

I thought a board game business was about playing games...
I am addressing individuals who file their board game publishing business taxes on Schedule C with their personal tax return. I will start with some of the most valuable deductions I believe are often overlooked (in order of the largest tax savings for us in 2016) and then move on to specific line details.

Please note that I am not an accountant and what is listed below is my own perspective based on reading IRS documents and soliciting professional advice. I am happy to help answer any questions via this blog or email (games [at] piecekeepergames.com) but consider hiring an accountant as needed.

What's New

  • Very few tax law changes

    Very little changed with US tax laws between the 2016 and 2017 tax years that impacts small board game publishers. However, there are larger changes looming for the 2018 tax year.

  • Removed non-taxable gifts

    After further consulting legal advice, I no longer believe any Kickstarter pledge amounts constitute non-taxable gifts. So you need to report all the funds received from Kickstarter as revenue.

Overlooked Deductions

Line by Line Guidance

What am I supposed to do with this Schedule C?!

Here is some guidance for every line on Schedule C that I have used in 2 years or believe might be used by other small board game publishers. I did not mention lines that are simply addition or subtraction of other lines. You may want to review the lines in Part II that I did not address to see if you should use them in your situation. Through 2 years I didn't need them.

If you don't already have a good system for tracking your business expenses, I would be happy to help you figure out a quick way to meet your needs. However, that topic would be a rather lengthy blog topic by itself so please reach out.

Business Information

  • Line A: Principal business or profession

    A description of your business. You are welcome to copy what I listed: "Board game design and publishing, create and sell board games to customers, retailers, & distributors"

  • Line B: Principal business or professional activity code

    I believe you should list 423920 (Toy & hobby goods & supplies).

  • Line C: Business name

    If you formed a legal entity for your business, list the full name here. Otherwise, leave blank.

  • Line D: Employer ID Number (EIN)

    If you filed Form SS-4 to obtain an EIN for your legal entity, enter the number assigned here. Otherwise, leave blank.

  • Line E: Business address

    List your home address or other business address as applicable.

  • Line F: Accounting method

    If this is your first year filing, you need to pick between Cash and Accrual. Otherwise, it is best to continue filing under the method you used in prior years. Accrual is more work but you don't have to report your Kickstarter income until you deliver rewards. The debate of Cash vs Accrual is better suited for another post.

  • Line G: Material participation test

    This should be "Yes" for board game publishers. There are technically 7 tests to determine your answer, but you should be covered under test 1 (spend 500+ hrs on your business in the year), test 2 (your work in year is substantially all of the work for your business, including those you paid), or test 3 (spend 100+ hrs and no one else spent more time than you on it).

  • Line H: Did you start or acquire your business this year

    Simplest line to complete with a "Yes" or "No."

  • Lines I/J: Required to file Form(s) 1099

    Generally, if you paid contractors more than $600 in a year via cash, check, or bank transfer you should mark "Yes" for both and file Form 1099-MISC for each contractor to report money paid to them. If you paid them via PayPal, Square Cash, Google Wallet, or the like, those companies are required to issue 1099-MISC to recipients of funds if the recipients receive more than a certain amount of funds; there is no reporting requirement for you in this case.

Part I: Income

  • Line 1: Gross receipts or sales

    All income you receive should be included here. You should subtract any sales tax paid on income; it is not supposed to be listed as an expense but rather subtracted from your income. Note that if you use the accrual accounting method, you do not need to list income for pre-orders until you fulfill the orders.

  • Line 2: Returns and allowances

    If you refunded money to customers, list that here. Technically you could also include discounts given to customers if you included the normal sale price (pre-discount) in line 1 for those transactions. I find it is cleaner to list the discounted sale rate in line 1.

Part II: Expenses

  • Line 8: Advertising

    Include all marketing and advertising efforts. For me this included (from largest to smallest costs):

    - Convention expenses, except business mileage or gas for your personal car (line 9), lodging, air travel, rental car and rental car gas, public transportation, tolls, parking (all in line 24a), and food costs (line 24b). You might ask, what is left of convention expenses? Registration fees, booth fees, insurance, banners, tshirts and giveaways, etc.

    - Marketing sponsorships

    - Costs for getting games to reviewers (e.g. prototypes, shipping, reviewer fees)

    - Backing other KS projects to increase my backed project count

    - Website costs not paid to a developer (instead list that on line 11)

    - Website ads

    - Business cards

    - Giveaways (e.g. board games, gift cards, swag)

    - Product samples to prospective customers

    - Demoing expenses (e.g. renting community center)

  • Line 9: Car and truck expenses

    Since I elected to deduct business mileage I only included business mileage here (from my Mileage Log.) Otherwise, list gas and a proportional amount of maintenance attributable to your business travels. You are better off deducting business mileage or going the simple route of just gas receipts.

  • Line 10: Commissions and fees

    Include Kickstarter and other payment processing fees (e.g. PayPal, Stripe, Square, etc).

  • Line 11: Contract labor

    Include amount paid to contractors or non-employees that you pay to do work (e.g. artists, graphic designers, videographers, website developers, voice-over artists, etc).

  • Line 18: Office expenses

    Include software costs (e.g. Adobe, Dropbox, etc), office supplies, furniture or organizational items for your office. Regarding office supplies, you should categorize the cost of supplies to build prototypes in line 8 (Advertising) if you gave the prototypes away or line 27 (Other expenses) if they are general game research & development.

  • Line 23: Taxes and licenses

    Include business fees (e.g. state business and sales tax registration, standard manufacturer code registration fee, etc). Deduct sales tax from income in line 1.

  • Line 24a: Travel

    Include lodging, air travel, rental car and rental car gas, public transporation, tolls, parking.

  • Line 24b: Deductible meals and entertainment

    Include 50% of food/drink or per diem allowances (see details above). Also include 50% of reasonable entertainment costs, which must involve substantial business discussions or take place before or after substantial business discussions with clients, customers, and/or employees. Note that entertainment expenses are closely scrutinized in the case of an audit. Refer to Publication 463 for specific guidelines.

  • Line 26: Wages

    If you have employees, you probably aren't filing Schedule C anymore.

  • Line 27a: Other expenses

    Include all expenses that do not fit in any of the other expense lines. You must summarize each grouping of expenses included in this line in Part V (Other Expenses). For me, I included the following expenses (from largest to smallest costs):

    - Shipping. You may want to split out shipping to prospective customers (Product samples within Line 27a) or for marketing/advertising (line 8) to have a better handle on shipping related to actual customers, prospective customers, and other marketing efforts.

    - Research and development. Include prototype costs you accumulate over time. If you make purchases to build a prototype to mail to a reviewer, I would include those in line 8 (Advertising), but it is acceptable to list all of those here as well.

    - Market research. Includes costs of buying new board games. Determine whether to include cost of Kickstarter games in line 8 (Advertising) or here.

    - Product samples. Shipping costs to prospective customers. In future years I will probably roll this up into Shipping (line 27a) or line 8 (Advertising).

    - Start-up expenses. Include all business costs before you officially started your business. Hopefully these total less than $5,000 so you can deduct them all easily on this line. Otherwise, it gets complicated quickly. You should refer to Publication 535.

Part III: Cost of Goods Sold

  • Line 33: Method used to value closing inventory

    You should generally use the Cost method.

  • Line 34: Change in closing inventory

    Hopefully your answer is "No" so you don't have to do further calculations.

  • Line 35: Inventory at beginning of year.

    Include line 41 from last year's Schedule C (unless you marked "Yes" for line 34).

  • Line 36: Purchases

    Include manufacturing and freight costs.

  • Line 37 / 38: Cost of labor / Material and supplies

    If you run your own manufacturing facility, you probably are not filing Schedule C.

  • Line 39: Other costs

    Include import duty, customs fees, and the like.

  • Line 41: Inventory at end of year

    Include costs from lines 36 and 39 related to physical inventory you have not sold by the end of the year. Yes, this involves a physical inventory count and determining the portion of your costs related to your remaining inventory.

Part IV: Information on Your Vehicle

  • Line 43: When did you place your vehicle in service for business

    Enter earliest date you started doing business activities (before or after actually starting the business).

  • Line 44: Number of miles used for business, commuting, and other

    Enter values from cells B3-B5 on the "Mileage Log" worksheet of your completed Mileage Log in the appropriate spaces.

  • Line 47: Evidence to support your deduction.

    If you completed your mileage log, then mark "Yes" for both a and b.

Part V: Other Expenses

See notes on line 27a.

Questions?

Feel free to ask Kirk any questions in the comments or email games [at] piecekeepergames.com. Maybe you already filed your taxes and wish you had the opportunity to claim some of the deductions listed. If so, you have a lot of time to consider amending your return if you believe it is worth your time.

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Comments

Nick from Weird Giraffe Games

March 14, 2018
Don’t forget that you might want to report the amount of money you raised from Kickstarter as income before Kickstarter takes its fee cut. Think of it as your income is all the money your backers gave to you and then separately you had an expense to pay Kickstarter and stripe fees for services they provided. They just took their fees out of money you earned before giving it to you. I believe that’s how USA IRS thinks of it...

Kirk Dennison

March 14, 2018
Thanks Nick for your input! Yes, that is a good reminder. Line 10 is where creators should list the Kickstarter and Stripe fees paid for by Kickstarter on their behalf .

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