When are royalties taxed?

Discussion in 'Indie Business' started by Bram, Feb 13, 2012.

  1. Bram

    Indie Author Greenlit

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    Hi,

    I am adding up the royalties that Apple paid me in 2011 so that I can file for taxes.
    (I file over jan-dec periods).

    I am confused over the royalties payment that Apple sent me for dec 2011 sales.
    They sent this money on feb 2, 2012.
    Do I add this payment to the 2011 tax return or the 2012 tax return?

    In short: Are royalties taxed when earned, or when paid?
    How are you guys handling this?
    I could only find some info on this UK site:
    http://authornet.cambridge.org/help/faq.asp#AnnualTaxReturn
    Which says it is taxed when received, not earned. But I am in Canada.

    Bram
     
  2. Scharlo

    Original Member

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    There is no easy answer for this because your question is missing lot of information. First, are you corporation or individual? This will determine your fiscal year end and way/deadline for your taxes.
    Royalties are not directly taxed as you said, but the income is (again rate depend if you are corporation or individual). I assume you wanted to ask in which fiscal year should you put your royalties? Answer is definitely NOT when they are paid - this is totally irrelevant. You have to report them even if they are not paid (and pay taxes on income from them even if you didn't get paid yet).
    As long as you are getting the report in timely manner (one or 2 months behind), you should be using the month in which they were earned (bit hard with Apple weird concept of 'fiscal month').
     
  3. lennard

    Moderator Original Member Indie Author

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    I'm no accountant but this seems odd to me. What if you are paid quarterly with a 90 day delay? What if you get a report but your payer goes under before delivery of cash?
     
  4. Grey Alien

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    OK I disagree with Scharlo here on the point that you should report them even if not paid. It's totally fine to declare your royalties as earnings based on the date they were received into your bank account (not the month that the royalties are from). In fact some portals ask you to make them an invoice before they pay out the royalties and if you do that, then your invoice date is the important date. Some really crappy portals have such low sales and high payment thresholds that you may not see payments for months/years. That's why you should declare the earnings when you receive the payment. Now, if you did it Scharlo's way, that would also be fine, just more inconvenient and worse from a cash flow point of view. The point is also to choose a method and be consistent with it. Don't change methods all the time just to maximise/minimise your earnings for tax purposes as you may get into trouble for that. My caveat is that I run a UK-based corporation and I've been using accountants for 9 years (who advised me on this) and never had a problem doing it my way. Perhaps things are different where Scharlo is from (Ontario) for some reason, but I find it odd...
     
  5. Dingo Games

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    This is a question of "accrual method" vs "cash method" of accounting. As far as I know, you have to use the accrual method in Canada. That means reporting in the period earned not in the period paid. There might be special rules for royalties that I don't know about, but I've always used the accrual method for my sole proprietorship and now for my corporation.

    Here's the relevant page on CRA's website:
    http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/ccntng-eng.html

    If the customer never pays you, then you would write it off as bad debt so your income in the period written off would be lower.
     
  6. Grey Alien

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    Interesting. I normally do accrual accounting for my business (so log the date I make an invoice, not the date I receive payment), but with royalties it can be argued that the date you receive the royalty report is in fact the date you would have made an invoice (if the portal asked for one) because it wasn't possible to even make one before you received sales data. So that could be a good compromise rather than basing it on the date actual payment was received, especially with portals who only send out quarterly reports.
     
  7. terin

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    I run it mine as a cash method business, if a payment is deposited (not received) at 12:01 Jan 1, 2012 it's part of 2012's tax year for me. As stated above, the end of the year may not be the fiscal end of your year. A lot of this has to do with the "how did you do it last year?" question... and if you are a new business things like cash vs. accrual you can simply pick.

    This sometimes depends on how you formed your business though... so... short answer: ask a CPA and they'll tell you the local laws as they apply to you in like 5 minutes :)
    -Joe
     
  8. Simon Tomlin

    Simon Tomlin New Member

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    I would make it when you know that a sale or royalties have been earned. As already stated consistency is very important.

    In your example you received notification of earnings in Feb 2012 and should go into that tax year since you could not have reported it at the end of the last tax year since you did not know then. If you really want to put it in last years figures then you can with the understanding that if you file again that way and an earning from the previous year shows up after the filing you then have to file an amendment. Since this is a PITA I would file when I found out about it. As long as each year has 12 payments from Apple you will be all right - having 13 months in one year and 11 months in another just looks bad and could be a reason for them to look closer at you - something no one wants.

    What is important is not to be seen to be massaging the figures for convenience like putting it in last years figures since you did not earn that much in that year - new game launch for example.

    In a tax man's ideal world he will be able to cross reference what Apple reported paying you with what you are declaring.

    Congrats on earning enough to be dealing with paying tax.
     
  9. Dingo Games

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    @GreyAlien I never gave it much thought before, but that does make sense.. Next time I talk to my accountant I'll have to ask him about this.

    Now for the original question about Apple - the way they treat sales is actually quite different than most other distributors. They treat YOU as the seller of the app. For Canadian sales, Apple even collects GST/HST and remits it to CRA on your behalf. Since you are the one selling to the end user, I would suggest that the income is being earned at that time rather than when Apple reports it to you (and certainly not when Apple pays you).

    I agree with what others have said about consistency. Really what they don't want you doing is fudging the numbers to lower your tax burden.
     
  10. Grey Alien

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    @Dingo Games: Interesting info about Apple, I didn't realise they worked differently from other portals. I wonder if they collect VAT for UK/European sales? I bet they only do that if you set yourself up as a business (with a VAT number) not as an individual.
     
  11. Grey Alien

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  12. Bram

    Indie Author Greenlit

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  13. Dingo Games

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    ...This is way too complicated. I'm going back to game development. :)
     
  14. Grey Alien

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  15. Scharlo

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    You should report them at the moment you issue an invoice (as you stated in your later post). It is totally irrelevant to CRA if they are paid or not, you have to pay taxes. This goes for any kind of income, not only royalties. If you never get paid, you can write them off as bad debt (usually next fiscal year). Moment you issue an invoice, your revenue is recognized by CRA. It is totally irrelevant if you got paid or not. In the case or royalties report, this is a bit tricky because you are not obligated to issue any invoice (most of the time). I had multiple audits and we are receiving royalties from 20+ countries (each one with the different tax law, different tax withholding rules, etc.) so I had to go through this numerous times.
     
  16. Applewood

    Moderator Original Member Indie Author

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    That's the weirdest thing ever scharlo, I guess it must be a Canada thing.

    Not sure how anyone expects you to pay taxes on money you don't have yet. What we have here are called "tax events" and as usual the lawyers can make that real complicated, but it basically comes down to you taking a slice off whatever sums are taxable when you get them in your hand. Anything else is just fucked up tbh.

    Regarding VAT (or sales tax), you don't actually "pay" that, you "collect it". If your sale is VATable, you add the number to the charged price and declare that extra amount on your bill. If someone doesn't pay VAT for any reason (foreignor, self employed under the threshold, etc) then you don't collect it from them. In other words you don't declare VAT on a payment from Apple because they didn't charge UK VAT on the sale. (Actually they do have an agreement with the govt to contribute their sales tax, but all that happens long before we see a payout - those payouts are net of VAT)

    Hope that helps.
     
  17. Grey Alien

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    If you weren't confused before I bet you are now! ;-)

    Also worth noting is that if you are not based in the US most portals will withold tax (like 30%) until you fill out a W-8BEN form. Once that's sorted they'll pay your your share properly. And yeah like Applewood says, the portals collect sales tax, so you don't need to worry about that, but you do need to log the income received (on an accrual or cash accounting basis) and then your company (or you if self-employed) will need to pay tax on that at the year end.

    It just means in real terms you see very little of the sale price of the game in your actual pocket.
     
  18. Scharlo

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    I am not sure it is just Canada; it is more the fact that majority of the companies are using accrual basis accounting vs. cash (or deferred) based as someone mentioned before.
    Obviously that mean your expenses are recognized the moment you get invoiced, so it does have some benefits. It's all good if you get paid in some reasonable time frame (or at all).
     
  19. Applewood

    Moderator Original Member Indie Author

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    How about the end of last year when I'd invoiced for £40K of contract work and we got stiffed? Deliberately it turns out.
     

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