Getting started: Taxes question

bebry · 08-26-2008, 11:11 AM

Hello everyone,

I've been lurking for the last few weeks, but decided it's time to jump in. I've got some ideas for a couple of iPhone apps that I think I'd like to take a stab at. My question doesn't have to do with the learning curve of the SDK and Objective-C and the like, but rather with the business side of getting things started.

I'm new to the whole Mac thing (got Windows PCs at home and work), so I'd need to invest in at least a Mac-mini to devlelop some applications. At a later date, I'll need to purchase an iPhone to test my apps (already own an iPod Touch). Now the question: Before I make the above purchase(s), should I (as an individual developer) incorporate my own business and keep track of expenses that way? Or can I just file my taxes with some additional income (hopefully) and expenses? Just wondering what other individual/non-business-affiliated SDK developers are doing...

Any help or insight is appreciated.

Thanks

**Chris Stewart** · 08-26-2008, 11:24 AM

Excellent question and a perfect topic for the first in the new business forum.

Technically, you can go either way. If you want, you can file your taxes next year and will have room for these additional expenses and hopeful income. I've done this in the past for consulting work I've done and other items that could be classified as a business, only I did them in my name instead.

That said, there are certainly advantages to forming a legal entity to operate under. I have formed 913solutions, LLC and I'm the sole manager of the company. I've done my homework there, have filed the proper federal/state/local forms, have created bank accounts in the name of the business, and so forth. Having a legal entity to run my operations through creates a proxy for my personal possessions. If my business tanked and I owed on loans, the creditors can only take what the business owns. They couldn't go after my homes, cars, etc. In the case of doing business as yourself, it's your personal items that can be taken.

The cost of forming a business is very low and definitely worth doing. I think the only cost I incurred was a $100 fee for the Articles of Organization. The protection you have with a business makes this well worth the process.

hijinks · 08-26-2008, 11:38 AM

I do a lot of freelance work on the side and I don't do it under a company name since it's all work from friends I know.

It is worth it to create a LLC to protect your personal assests from being taken like the previous post said. I also have a LLC for jobs that are more risky.

I find taxes are easier to do just claiming more assests from a 1044 i think the form is.. and then saving recipts so I can deduct it. Every laptop I have gotten I've claimed as an expsense and wrote it off.

ayasin · 08-28-2008, 11:04 AM

I've been an S-Corp for several years now and based on advice from my attorney and accountant that was the best option for me, but it may not be the best option for you. I would suggest finding an attorney in your area who specializes in business law and getting a free consult (even if you have to pay for an hour of his time it's worth it) and also talk to an accountant that specializes in small businesses. You may end up dropping some cash to do this but its totally worth it. In the end, you'll end up with a much better understanding of what you want and what you need to be doing taking into consideration your current assets, income and the potential of your business.

Dj_AmTraX · 08-30-2008, 11:12 AM

I like to add to the question.

Since we are new to the iPhone app business and may or may not make money. Is it worth it to do all that is suggested now? If app makes money, can't you set-up the formation then?

**Chris Stewart** · 08-30-2008, 03:22 PM

Quote:

Originally Posted by Dj_AmTraX

I like to add to the question.

Since we are new to the iPhone app business and may or may not make money. Is it worth it to do all that is suggested now? If app makes money, can't you set-up the formation then?

Technically, yes. However, for such a low expense, I'd say go ahead and file your papers. It's a very quick and easy process.

ayasin · 08-30-2008, 04:52 PM

Quote:

Originally Posted by Dj_AmTraX

I like to add to the question.

Since we are new to the iPhone app business and may or may not make money. Is it worth it to do all that is suggested now? If app makes money, can't you set-up the formation then?

I have to disagree with Chris here a bit. I'd say if you're unsure go ahead and see how things go. You can always go from a sole prop to something more complex. One thing I would definitely do is set up a separate bank account for all this money. Draw all your business expenses out of that and put all business proceeds into that. This will really help you around tax time and if/when you decide to take the next step in your business.

The only real caveat to this is if you have a lot (million plus dollars) of assets to protect and your app has the potential to get you sued (like a weight and balance app for a private plane that provides bad results causing the plane to crash). In that event I'd go ahead and set up a simple LLC/S-Corp.

flipflop · 09-01-2008, 01:40 PM

I've been thinking about this for years - but it never really seemed like that the couple of hundred I made a year warranted all the additional complication to my tax filing situation.

Up to this point, I've been tacking my earnings to the standard Royalty form - and it seems OK enough for me. Although... whenever I purchase a new PC a little part of me feels stupid for not being able to write it off. But I keep telling myself that it's just a hobby.

In any case, there seems to be quite a few people who've gone the next step, and I'm curious as to how hard or easy it is to do. At various points through out the years, I've been to the SBA site and read all the various IRS pubs - and it seems overwhelmingly confusing.

If one should decide to incorporate, are the fees one-time or yearly? Ditto for the $99 apple fee.

The idea of opening a separate business account seems rather interesting to me - but in the beginning, when you don't have any inflows yet -how do you go about purchasing stuff for the business? Do you initially have to use personal funds - and if you do - can you still deduct them as business expenses? In my case, I suppose, I could write a check equivalent to all my previously royalties over the years - but what happens when expenses start to exceed inflows?

Would any of you folks care to share a site or a book that you used to get the ball rolling?

Thanks in advance for any replies.

ayasin · 09-02-2008, 05:00 PM

Quote:

Originally Posted by flipflop

I've been thinking about this for years - but it never really seemed like that the couple of hundred I made a year warranted all the additional complication to my tax filing situation.

That amount of money is too little to bother with anything other than just rolling it into your personal income (you probably don't even have to bother with that for a couple of hundred dollars)

Quote:

Up to this point, I've been tacking my earnings to the standard Royalty form - and it seems OK enough for me. Although... whenever I purchase a new PC a little part of me feels stupid for not being able to write it off. But I keep telling myself that it's just a hobby.

In any case, there seems to be quite a few people who've gone the next step, and I'm curious as to how hard or easy it is to do. At various points through out the years, I've been to the SBA site and read all the various IRS pubs - and it seems overwhelmingly confusing.

It's not hard to create a business but I would recommend speaking with a lawyer and a CPA. It's WELL worth your time and money to do this if you're serious. They get paid to understand all this stuff. It's totally penny wise pound foolish to skip this step to save a few bucks.

Quote:

If one should decide to incorporate, are the fees one-time or yearly? Ditto for the $99 apple fee.

The filing fee is one time, Apple's fee is yearly. There are additional costs associated with being a business (filing more forms based on what kind of business etc) that you should discuss with a financial professional.

Quote:

The idea of opening a separate business account seems rather interesting to me - but in the beginning, when you don't have any inflows yet -how do you go about purchasing stuff for the business? Do you initially have to use personal funds - and if you do - can you still deduct them as business expenses? In my case, I suppose, I could write a check equivalent to all my previously royalties over the years - but what happens when expenses start to exceed inflows?

If you're an S or C corp you do this by funding the account with money from your personal account. The corp then give you shares to compensate you for the money you provided. The amount you put in divided by the number of shares you got is the par value of the shares. Any money you spend from this account (even if it's to pay your own salary) is a business expense. Again an accountant can go over this with you in great detail...you should consult one.

flipflop · 09-03-2008, 09:04 PM

Thanks for the reply.

I know it's not much - but it buys a couple of pizzas - and there's a certain level of satisfaction from each sale that I get - that doesn't seem to come with my day job

.

Still, I do make enough to offset the expenses for a new computer every couple of years - any ideas how I could get that written off as a business expense?

As for possibly not needing to pay taxes on said amount - I dunno - better safe than sorry. As a sole proprietor - I imagine the IRS would consider my entire estate fair game if they caught any discrepancies. As you say - why be penny-wise and pound-foolish.

On a similar topic - how does Apple treat your earnings tax-wise. My current provider sends me a 1099-misc with my earnings treated as royalties - is it the same?