In less than two weeks, we'll be ringing in 2016. Then by mid-late January tax season will officially kick off when the IRS opens for return acceptance. (And I will proclaim, "Tax season is here and thank Toad I'll be at GDC and not in a tax office!") If I were back in that environment, this would be the time of year people would be making final tax planning appointments and discussing their last-minute tax strategies plus concerns for 2016 before the office closes for the holidays.
So as another tax season is upon us so soon, it makes me think about how I'm grateful that I have the skills and tools to take care of my studio's taxes without a hitch. We don't use an outside tax professional because I spent way too much time in school becoming a federally-licensed tax pro. I have other things I'd rather outsource due to time and/or skill level. But I know that this is not the case for a vast majority of game developers who more often than not lack background in taxation.
Worse yet, a lot of my fellow indies can't afford a preparation appointment, let alone a year-end tax planning one in addition to when they need their actual taxes done.
Even worse, if money wasn't an issue there's still the fact that the gaming industry is really misunderstood by the world at large and the professional sector is no exception. What to do?
Options when you can't afford a tax professional out of the gate
In the various business courses tailored to indie developers that I've taught at Playcrafting, including one solely dedicated to indie dev tax issues, I was virtually always asked about tax resources since I have a decade of experience in the tax profession. If you have your own studio or do freelancing, it's definitely prudent to work with a licensed tax professional: "TurboTax told me it was okay!" has never, ever held up in Tax Court.
Self-preparation is still an option. It's one I really don't recommend if you have your own business or multiple hustles and didn't come from a financial background. But it's an option no less.
If you're going to go the self-prepared route you'll want a good tax guide to help you figure out not just what you're allowed to write off, but how the law applies to your business and personal situations. Some small business tax guides are very good but they cast too wide a net or don't take the vagaries of the indie life into account: you should take a look at the very first tax guide meant just for game developers that I set at a very indie-friendly price.
If you don't want to take your chances on going at self-preparation completely alone, a tax pro will usually review a self-prepared return for a lower fee than if they prepared it from scratch.
You can also try a VITA (Volunteer Income Tax Assistance) clinic which is an IRS program comprised mostly of students and retired CPAs and Enrolled Agents that offers free tax preparation to people whose income falls under $54,000. Some VITA sites also offer self-prepared options where you can use free IRS-sanctioned software to do your taxes and ask the volunteers questions. You can use the same software at home for free at freefile.gov if your income is less than $54,000.
For all of us self-employed devs, this would mean if your total profit was less than $54,000 when combined with other income you might have. But if you have a different kind of business other than a sole proprietorship, you're likely not going to get the kind of help you need from VITA such as business returns. The IRS tends to assume that if you set up an S or C corporation, you are beyond the point of needing VITA. This is a wrong, wrong assumption but that's a post for another time.
For free tax consultation, you might want to check in with your state's bar referral service where you can often get a free or very low cost half-hour consultation with a tax attorney, as some states require minimum annual bar referral or pro bono work. SCORE and your local Chamber of Commerce are also good places to network with retired tax professionals who can help you for free or at low cost. I wouldn't count on them knowing the gaming industry, but if you're insanely cash-strapped it's an option.
Choosing and working with a tax professional (who may need to be schooled on the gaming industry)
First, talk to fellow indie developers that you know and ask if they are working with a tax professional. If you go to game development collectives and industry events, are there are any business resources where you can be connected to a local tax professional or recommended to one? Does your local IGDA chapter offer anything helpful here?
Not barring states that don't have income taxes, it's a good idea to work with a tax professional who's local and can tell you how your state/local revenue codes also affect your taxes. Unrelated business taxes can also easily sneak up on you if you're not careful so it's good to stick with someone local who is more familiar with the sneakier taxes than you are. (Also? State revenue departments are waaaay scarier than the IRS. The IRS has to follow a due process for back taxes. States don't!)
A good tax professional is someone who you don't want to just call on during tax season every year. Tax problems crop up year-round and you want someone who is available year-round as a result. The more you grow your business and the more complicated decision-making that entails, the more you're going to have to call on their expertise.
Now, being game developers, you'll also prefer someone who knows the gaming industry which you might get by asking a fellow indie to recommend someone. But that's harder to find than you think. So you need to clearly communicate what the business environment and lifestyle is like for the typical indie developer, namely that cash flows are extremely unstable and fraught with protracted timeframes or little or no income. Telling them this is going to go a long way in getting effective tax planning: I've facepalmed over many tax professionals who tend to think that "indie developer = TellTale or similarly sized company with a healthy profit".
When you start making more money and/or hiring employees plus paying yourself, that's also when you'll need to start thinking about the R&D Credit. When you're just starting out and can't pay yourself yet, you're more likely to benefit from the R&D deduction instead and it's not time yet to seek supplemental tax help or changing pros.
With that said, you also want a tax pro who is digitally competent and displays an understanding of the digital realm and business environment, if not gaming specifically: you don't want to work with someone who can't comprehend that you don't have a fax number that's dialed from this beast predating the Truman administration, and needs written instructions for how to copy and paste text into an email.
Who's ultimately responsible for what goes on your tax return?
You! Your tax professional's job is to advocate for you. But you also need to advocate for yourself in the form of good recordkeeping and telling them about important events and decisions (such as timing a game's release or if you want to donate a huge amount of swag to charity). We don't like being sweared at like you just had to ragequit Call of Duty when we were a phone call or email away from that massive amount of money you just put into new software only to find out it didn't give you the tax benefit you hoped for.
Morever, the tax pro is only responsible for what you tell them. If you're still married but say you're divorced and say nothing about a royalty check that never got a 1099, and the powers that be find out, you're the one who's going to pay for it. Not the tax pro.
But if the tax pro does something really bad, you can report them to the Return Preparer Office division of the IRS and seek relief. Licensed pros that do bad things are far and few, but they're still out there. It's really the fly by night outfits that promise you a bigger refund to watch out for.
Final tax tips for indie developers
- Keep good records. I can't stress this enough!
- Keep business expenses separate from your personal ones. Try to use a separate debit/credit card and go cashless whenever possible for income, expenses, and reimbursements.
- Keep your development cost records separate of your normal business expenses. There are various treatments in the tax code that could apply so you need to be able to reference them.
- Stick with a licensed professional like an Enrolled Agent or CPA. If you can't afford a full preparation appointment, go to one for review of your self-prepared return.
- A good tax pro asks you lots of questions. Especially if they're not that familiar with the indie life. Don't work with someone who just takes your documents and says nothing.
- If you need extra time to file your taxes, filing a 6-month extension only gives you extra time to file without a penalty-- not extra time to pay. Interest will still rack up if you owe money.
- Find out about how to hack and slash your tax bill with The Definitive Guide to Taxes for Indie Game Developers!