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 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 - Board Game Taxes
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.
When driving anywhere for the purposes of business, you can count the mileage driven as a business deduction. This can save you a lot of money on your taxes compared to just deducting your gas receipts (you can only deduct one or the other). However, many people find it overwhelming to record your business mileage accurately and easily (due to IRS rules) and settle for just claiming gas costs.
Hopefully I can help make this process much simpler. I created a Mileage Log that satisfies all IRS rules and is pretty easy to use. I have now used it for 2 tax years and am ready to share it with others. Feel free to share with others and ask any questions.
Notes: - Instructions: I put together detailed instructions in the "Instructions" worksheet.
- Examples: I listed some examples to help get you started on the "Mileage Log" worksheet.
When traveling to conventions, you will often spend the night away from home. If that is the case, you can often deduct a larger amount of money than you actually spent on food by claiming per diem rates instead of your actual food costs. I spent 16 days away from home in 2016 for conventions and was able to deduct ~$41 more per day per person via per diem rates than what we actually spent. Since I had someone helping me at each convention, this totaled $1,320 in additional deductions.
The best part is that per diem deductions are extremely easy to substantiate. Simply keep a record of which days you traveled and spent the night away from your home (travels where you sleep at home don't count for per diem rates). Then lookup the daily per diem rate by entering ZIP of the convention and dates you travelled. Use the "M&IE" rate.
Notes: - On the first and last day of your travel, you can only use 75% of the per diem rate.
- Much like all other Deductible meals & entertainment expenses (see line 24b), you can only deduct 50% of the per diem rate (so on the first and last day of travel you can only deduct 37.5% of the per diem rate).
- As a self-employed person (i.e. someone filing Schedule C), you may not claim per diem rates for lodging, so disregard documentation for that.
- You can claim per diem for each person who travels with you and helps you. Publication 463 lists rules when you can claim per diem for persons helping you on travels under "What Travel Expenses Are Deductible." Effectively, condition 1 ("is your employee") is moot if they meet the qualification of business associate, which most everyone who travels to help at a convention does.
- Continental breakfast is not considered a meal for per diem purposes so you can still claim the full day's per diem rate even if you eat a free meal at your hotel.
Home Office Deduction:
If you have dedicated space in your home for your board game business, claim the full home office deduction instead of the simplified method. Especially if you don't have enough profits in a year (or lose money) you will not be able to claim the simplified method. Plus, the simplified method provides less of a deduction.
I recognize many people warn against using the home office deduction but it is worthwhile if you qualify. Moreover, with the full deduction you can count space used to store physical products even if that space is used for other purposes throughout the year (several court cases have confirmed this). See Line 30 for more details.
Board Game Purchases
You should be categorizing ALL board game purchases as business expenses. Every aspect of purchasing, opening, and playing a game is market research. You can learn a lot from every new game you acquire, including: seeing how the game is packaged, inspecting component quality, reviewing rulebooks, among many other things, not to mention playing different styles of games.
This is a definite perk to owning a business in the board game industry, so take full advantage of it. Depending on your tax bracket, you will effectively be able to buy games for a 15% (or greater) discount.
Line by Line Guidance
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.
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 transportation, 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.
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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