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I'm finishing up a successful KickStarter campaign. The approximately $8000 is going to be used as capital for my software startup. I'm currently structured as a sole proprietorship, so the $8000 is going into my personal checking account.

I have two concerns related to my situation:

  1. If I spend this $8000 on startup costs before the end of the year, I can write the entire amount off, thus effectively negating its would-be increase on my tax bill. However, if I don't spend the entire $8000 before year-end, I'm on the hook for it the difference at tax time. Is this correct?

  2. I plan on switching over to an LLC at some point. If I switched now, I would then transfer the $8000 from my personal checking into my LLC bank account before years end. As an individual would this be a write off on my individual tax bill? And, as an LLC would this be considered capital, not revenue, and therefore not pass through to myself as income?

Thanks in advance!

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You don't state what jurisdiction you are in therefore it is hard for the international audience here to answer your question accurately. You really need to speak to your accountant about this. – Susan Jones Sep 22 '12 at 12:17

1 Answer

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  1. You're on the hook, tax-wise, for this money. You may be able to offset it with deductible expenses, but if you don't have enough of those before the year end - you'll have to pay taxes (possibly also SE taxes) on the difference. You have to remember that not every business expense is deductible, some aren't, some have to be capitalized or amortized.

  2. LLC is a disregarded entity tax-wise, its just another name for yourself, as much as IRS is concerned, unless you decide to tax it as a corporation. In any case, investment is not a deductible expense.

Talk to your tax adviser as to how to deal with this issue now. Ideally you should have done that before raising money.

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thanks littleadv. Like many other KickStarters I didn't think about this stuff until it was too late. Lesson learned! – Joe Sep 20 '12 at 17:42

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