Incorporation and Taxes
Submitted by John on Mon, 11/29/2010 - 15:31
As we move towards formally incorporating the project, I've been looking into a couple issues surrounding taxes and non-profit status. While I'm still convinced that a non-profit organization is the best setup for the project, there are a couple hurdles to clear if we want to reap the full benefit of that status.
First of all, it's important to understand that not all non-profits are created equal. Anyone can establish a non-profit organization, and for any purpose; The only thing that differentiates it from a regular corporation is that it doesn't issue stock, pay dividends, or make a profit for its shareholders. A co-op would be an example of this kind of business. What really sets apart groups like charity organizations is not that they're non-profits: It's that they've been granted tax-exempt status by the tax authorities. (Just a note here, this is all predicated on us incorporating in the U.S.; there might be different laws in other jurisdictions, but I think the pattern will be roughly similar anywhere.)
For our project, tax exemption is what we really want to shoot for. There are two big benefits to getting tax-exempt status: First, the project would be exempt from paying taxes on its income, i.e. the donations it takes in. Less money to the government means more money for development! Second, donations to qualified tax-exempt organizations are tax-deductible for the giver; This means that you would actually be able to subtract any amount donated to the project from your taxable income. Not too often that you can buy a game and get a tax break!
The tricky part, though, is actually getting tax-exempt status. I don't think there's really much chance of our being mistaken for a charity organization dedicated to relieving boredom among gamers. Fortunately, there are some other options. In the U.S., organizations created for "scientific" or "educational" purposes can also qualify for tax exemption. These might be a much more plausible way to frame the project: since the software we create is arguably educational and can be used for scientific endeavors, there's a possibility we could be certified under one of these categories. This could be especially good if we were to partner at some point with a university or other research organization.
Even if becoming a fully tax-exempt organization proves out of our reach, I don't believe it will ultimately impede our goals; but the benefits of qualifying would certainly make things easier in the long run.
9 reponses to "Incorporation and Taxes"
1. That means that we need to
That means that we need to make sure that our game has all the educational features of all the SimCity games combined, Simutrans, City Life, and other similar games.
"Words are words; explanations are explanations, promises are promises, but only performance is reality."
Always do your best and you will always be better than the best in my eyes.
2. Or, even if the game itself
Or, even if the game itself isn't strictly educational, make the case that the basic software is easily adaptable for use as a research tool as well as a game; In fact, that's the same basis on which I would try to sell a university or other institution on partnering with us: supporting the development of Metropolis will yield a framework for experimenting with lots of different models, whether economic, social or otherwise.
3. This AzemOcram attempting to
This AzemOcram attempting to post from iPhone.
Most not for profit companies are exempt from tax in most countries. I believe that making the Metropolis Project and informational and educational software tool is possible and attractive. I, personally, would be willing to do research on how to use educational features without making the game boring or tedious. LinCity offers educational and game related information on everything in its menu through right clicks.
I might make a mockup later.
4. At least in the U.S.,
At least in the U.S., non-profits aren't exempt unless they specifically fall into certain categories, like charities. Something like a non-profit insurance company is most definitely taxed.
I agree that we should make an effort to make the game itself educational regardless, if only for the reason that it's easy to do and adds a lot of value. Between an in-game reference (like the Civilopedia from the Civ series), good tutorials, and some good historical scenarios I think the game could be a great learning tool in its own right.
5. Please do not try to game the
Please do not try to game the tax system for this video game. Change your calculated totals, ask for more donations but please don't deny the US Government of their rightly apportioned cut of your profit. When your project succeeds, you won't know what to do with all the profits. If you are wise about it, you would expand this venture into other genre and let us work to shape that game the way that we had for The Metropolis Project. I would urge you to steer away from Tax Exempt Status for your ambitions. Look how hideously it is abused in America. Do you mean to join rank with others who are so set upon working and making sales in American markets but unwilling to pay for the right to have access to them?
6. If the game is not sold,
If the game is not sold, copies cannot be taxed. Donations are usually not taxed. The wages of the developers might be taxed, however.
"Words are words; explanations are explanations, promises are promises, but only performance is reality."
Always do your best and you will always be better than the best in my eyes.
7. @Mighty_Borlaug: I'm
@Mighty_Borlaug: I'm certainly in no way suggesting that we try to "game" the tax system, or that I would apply for tax-exempt status in bad faith; I think software like this provides a legitimate public good, namely for educational and research purposes. I don't quite follow the rest of your post... This project is intended to be a non-profit enterprise with the goal of producing an open source game for free distribution, so there's no profits to think about; Ultimately that's irrelevant though, businesses, like individuals, aren't taxed on profits but on income; even if we have no net profit we will have to pay taxes on any income we bring in, i.e. donations.
@AzemOcram: You're correct on two counts: since nothing is being sold, there won't be any sales tax burden on the software; And the developers most certainly will be taxed on their income, at least if they live in the U.S. Donations however, although the donating party isn't liable for anything, will certainly be considered as income for our organization and taxed on that basis... unless we can get tax exempt status.
8. @ John: Woah, I think I
@ John: Woah, I think I missed something. Looks like I was mistaken that this was slated for eventual production for sales. My goodness I came away with the wrong idea completely! I stand corrected, since there are no sales involved at any stage of this production, only money donated for the game to be created and then made available for free; you have every right to seek tax exempt.
I am not sure where I got that mistaken thought that you wanted to sell it once it was made...
9. No worries, that's been a
No worries, that's been a common misconception, unfortunately. Actually, trying to summarize clearly and succintly what the project is about has been on of the biggest problems I've had so far.
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