Game Industry Start Up 101: Business Taxes & Incentives

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This presentation was for the Game Industry Start Up 101 Business Taxes and Incentives workshop. This program is brought to you by the Washington Interactive Network.

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Game Industry Start Up 101: Business Taxes & Incentives

  1. 1. Tax Help for Start Ups Presented by Dan Wright and Nicole Wilson
  2. 2. Introductions <ul><li>Dan Wright, Business Tax </li></ul><ul><li>Nicole Wilson, WA State Tax Specialist </li></ul>
  3. 3. Agenda <ul><li>The Do’s and Don’ts </li></ul><ul><li>WA B&O Tax Changes </li></ul><ul><li>Industry Examples </li></ul><ul><li>Tax Relief </li></ul>
  4. 4. Three biggest issues <ul><li>Create and document clear founder, investor, and key employee arrangements </li></ul><ul><li>Prepare for the next step </li></ul><ul><li>Manage your risk </li></ul>
  5. 5. Founder, investor, and key employees arrangements <ul><li>Considerations: </li></ul><ul><ul><li>Choice of legal entity </li></ul></ul><ul><ul><li>Owner agreements </li></ul></ul><ul><ul><li>Compensation arrangements </li></ul></ul><ul><ul><li>Joint venture arrangements </li></ul></ul>
  6. 6. Prepare for the next step <ul><li>Considerations : </li></ul><ul><ul><li>Know what you own and keep current documentation (R&D, intangible characterization, building value) </li></ul></ul><ul><ul><li>Representation and warranty </li></ul></ul><ul><ul><ul><li>Tax deal killers (tax records and filings are not current, under reported/not quantified) </li></ul></ul></ul>
  7. 7. Manage your risk (tax) <ul><li>Considerations: </li></ul><ul><ul><li>Jurisdictional risk (sales/use tax, VAT, other foreign tax) </li></ul></ul><ul><ul><li>Documentation issues (invoice format, contract considerations, resale certificates) </li></ul></ul><ul><ul><li>Understand options before assessing risk (voluntary disclosure programs) </li></ul></ul><ul><ul><li>More disclosure is the trend </li></ul></ul><ul><ul><ul><li>FIN 48 </li></ul></ul></ul>
  8. 8. What to expect… <ul><li>Federal income tax </li></ul><ul><li>State income or business & occupation tax </li></ul><ul><li>Payroll tax </li></ul><ul><li>Property tax </li></ul><ul><li>Sales & use tax </li></ul>
  9. 9. As technology changes, so do taxes… <ul><li>Expanded definition of digital goods </li></ul><ul><li>Online services now deemed retail sale </li></ul><ul><li>Requirement to file electronically </li></ul><ul><li>Amnesty for prior periods </li></ul><ul><li>Not all states define goods and services the same </li></ul>
  10. 10. Post July 26, 2009 Definitions of Digital Goods… <ul><li>All digital goods delivered to a buyer in WA state are subject to retail sales tax regardless of the method of delivery </li></ul><ul><ul><li>Digital audio works </li></ul></ul><ul><ul><li>Digital audio visual works </li></ul></ul><ul><ul><li>Digital books </li></ul></ul><ul><ul><li>Other products delivered electronically </li></ul></ul><ul><li>Digital codes </li></ul>
  11. 11. Certain Online Services Now Deemed Retail <ul><li>Digital automated services </li></ul><ul><ul><li>Services delivered electronically using one or more software applications </li></ul></ul><ul><li>Remote Access Software </li></ul><ul><ul><li>Allows a consumer the right to access prewritten computer software, where possession is maintained by the seller or third party </li></ul></ul><ul><li>Data processing services </li></ul><ul><ul><li>Subject to RST if performed by an automated process </li></ul></ul>
  12. 12. Scenario 1 <ul><li>$2,000,000 revenue annually </li></ul><ul><li>One shop – Washington </li></ul><ul><li>2 -4 employees </li></ul><ul><li>Platform – handheld </li></ul><ul><li>Unit Price - $ 1.99 per game </li></ul><ul><ul><li>Outright sale vs. 30/70 split between Iphone and Developer </li></ul></ul><ul><li>IPHONE Developer </li></ul>
  13. 13. Scenario 2 <ul><li>$2,000,000 revenue annually </li></ul><ul><li>One shop – Washington </li></ul><ul><li>4 -6 employees </li></ul><ul><li>Platform – PC games </li></ul><ul><ul><li>Developer hosted/ ASP delivery </li></ul></ul><ul><li>Unit Price - $10/month subscription </li></ul><ul><li>Ghost Hosts </li></ul>
  14. 14. Scenario 3 <ul><li>$10,000,000 revenue annually </li></ul><ul><li>Develop 2 games per year </li></ul><ul><li>One shop – Washington </li></ul><ul><li>60 employees </li></ul><ul><li>Platform – box distribution (Xbox, Wii, Sony) </li></ul><ul><li>Unit Price - $2,000,000 3 months after release and $ .50 per game sold </li></ul><ul><li>Big Game Blowup </li></ul>
  15. 15. Is there any relief from tax? <ul><li>Sales & Use Tax Deferral </li></ul><ul><li>Business & Occupation (B&O) Tax Credit for R&D spending </li></ul>
  16. 16. Sales & Use Tax Deferral <ul><li>What qualifies: </li></ul><ul><ul><li>New structures or, expansion or renovation of qualified buildings </li></ul></ul><ul><ul><li>Qualified machinery & equipment purchases </li></ul></ul><ul><li>For how long: </li></ul><ul><ul><li>Life of the business if R&D activity continues </li></ul></ul><ul><ul><li>And if you complete your annual surveys </li></ul></ul>
  17. 17. B&O Tax Credit <ul><li>Who qualifies: </li></ul><ul><ul><li>Any person engaged in qualified research and development in the 5 high technology areas </li></ul></ul><ul><ul><li>And </li></ul></ul><ul><ul><li>Its research and development spending in the calendar year for which the credit is claimed exceeds .92 percent of the person’s taxable amount for the same calendar year </li></ul></ul><ul><ul><ul><li>Example, for taxable income of $10,000,000, your R&D expenditures must exceed $92,000. </li></ul></ul></ul>
  18. 18. Tax Incentives – B&O Tax Credit Calculation <ul><li>Step 1: Determine the greater of the amount of qualified R&D expenditures or 80 percent of amounts received by a person other than a public educational or research institution in compensation for conducting R&D </li></ul><ul><li>Example: </li></ul><ul><li>2008 Sales $10,000,000 </li></ul><ul><li>$200,000 in R&D spending </li></ul><ul><li>Wholesaler (.484%) </li></ul>
  19. 19. Tax Incentives – B&O Tax Credit Calculation <ul><li>Step 2: Subtract .92 percent of the person’s taxable amount from amount determined in step one. </li></ul><ul><li>Example: </li></ul><ul><li>$200,000 R&D spending </li></ul><ul><li>$ 92,000) X .92 </li></ul><ul><li>$108,000 </li></ul>
  20. 20. Tax Incentives – B&O Tax Credit Calculation <ul><li>Step 3: Multiply the amount determined in step two by: </li></ul><ul><ul><li>For 2004 – 2006, the person’s average tax rate </li></ul></ul><ul><ul><li>For 2007, the greater of the person’s average tax rate or .75 percent </li></ul></ul><ul><ul><li>For 2008, the greater of the person’s average tax rate or 1 percent </li></ul></ul><ul><ul><li>For 2009, the greater of the person’s average tax rate or 1.25 percent </li></ul></ul><ul><ul><li>For 2010 – 2015, the greater of the person’s average tax rate or 1.5 percent </li></ul></ul><ul><li>Example: </li></ul><ul><li>$108,000 </li></ul><ul><li>X 1% </li></ul><ul><li>$1,080 </li></ul>
  21. 21. Questions?

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