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Comment by atdrummond | Hacker News Reader

Yes. There are ways they could have minimized that payment but it doesn’t seem that the team is primarily money motivated in the first place, so may as well just make the process simple and pay up.

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What ways are you thinking of? They could have incorporated and posted losses for 2? straight years before the IRS started auditing; those losses could have been deducted against this revenue. What other angles are there?

Set up an offshore that owns the IP and pay a licensing fee to the offshore? Licensing costs would then reduce net profits and likely also taxes, right?

Well when they want to withdraw the money eventually they’d get taxed right?

If they withdraw 100k a year for 20 years (or more if it's invested) they'll pay a lot less in taxes than 2mil once.

Yes, but as income at a more reasonable tax bracket. By default this kind of windfall is taxed the same as someone who makes that much money every year for years; all those shenanigans let you get taxed as someone making a smaller income for a longer time.

Plus, over that longer time you can list a lot of dual-use purchases as untaxed business expenses.

Fairly certain they already are incorporated. If you pay yourself with dividends you're paying corp tax + long-term capital gains, so 8.7% (for a delaware s-corp) + max 20% (less if they pay themselves minimal salary I believe) for a total of 28.7% (vs 50%).

IANAA.

In the US, only if your corporation is a "C" corporation. For an "S" corporation, the income, distributed or undistributed, is treated as income on the individual tax returns of the owners. So if you and a partner own an S corporation, and you make $800k in net income and pay yourselves $100,000 in salary each, you would pay yourselves salaries (SS & Medicare tax on that portion) and then income tax on the net income + salary, so you would owe about $156,000 in income tax, plus whatever your state charges, and you would owe about $8,000 in SS+Medicare (because the company has already paid the other half). Rough numbers, of course. This would asymptotically approach 37% of income as your income increases (plus state tax).

can't they book expenses? income taxes are to be paid on "net profit" and not gross receipts, right?

how can you pay half of revenue as taxes? this assumes tax rate is 50% and there are no expenses?

If we assume their previous income was covering their expenses (a reasonable assumption for a 18 year old company), the $7M from Steam would be pure profit.

Now I'm not sure about Washington (?) tax rates, but just for comparison: in Germany you would have paid about 35% taxes on company profits, and another 20% income/capital gains taxes if you just pay it all out to the owners. Not that this is the smartest choice, at that point you play games like keeping money in the company to spend on a company car. But if you don't care about optimizing your taxes 50% doesn't seem unreasonable.

Didn't Kitfox games did a lot of work on the Steam version (I assumed art, UI etc. were not done by Bay 12 games)? They must have incurred some expenses.

As I understand it, the figure quoted in the Bay 12 update is after Steam and Kitfox took their cut from the sales.

IIRC some of the types of corps (S-corp, the one that is NOT a corporate veil) lets you pass-through income and so you get hit by only one "tax".

But you still have state taxes and other such things. I assume they've retained a tax guy before this.

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