Open Source Software and Tax Breaks?

Mr. Magoo asks: "I know it's early but I'm already thinking about taxes. I started gathering up receipts, bank statements and paychecks. While doing so I had an interesting idea. Perhaps if there are any CPAs or tax attorneys out there reading Slashdot one of them can set me straight. I'm developing an application in my spare time and will release it as an Open Source project. I'm not looking for any kind of monetary compensation -- I'm doing it because I enjoy programming -- but perhaps with some creative accounting I can get Uncle Sam to contribute to my project. Would it be kosher with the tax laws to turn my project into a business organized as a sole proprietorship? There would never be any revenue to pay taxes on but there would be a number of deductions to take such as the depreciation of office equipment. I'm guessing you could even pay yourself a small salary (from your own savings) and that would result in your company having losses for the year which would be beneficial tax wise. So what's the verdict? Could Uncle Sam indirectly fund Open Source projects?"

Still on your taxes, and you must seek a profit.

[Zach Baker]

The basic aspect to remember about being a sole proprietor is that legally, for the most part, you are the business and the business is you. So if your business is sued, you're fully liable, and if your business has tax deductions, you take them on your own taxes. Unlike an incorporated business, all the income and deductions go on the sole proprietor's tax return.

However, let me point out to our readers (as you probably know yourself) the advantage to having a sole proprietorship, which is that it's relatively simple and cheap to set up. The only thing you really need is a business license from the city you're in (if none, the county). A separate bank account and ledger would help your tax case, though. One downside is that if you want to use a business name instead of just using your own, you have to register it with the county and do that "fictitious business name" thing in the local paper. All in all, not a bad deal, and hey, it's how eBay started out.

On another note, the main concern I'd have is that your premise of never having any revenue is not really workable. The problem is that the IRS defines a business as an enterprise with the intent of making a profit. No profit motive, no business. If you're not even going to have revenue, it's going to be very difficult to convince the taxman that you're in business at all. I guess you could incorporate as a charitable corporation, but it would be a hassle.

Fortunately, there's a simple solution: get revenue. Be enterprising! Sell ads on your website: hey, it works for Slashdot, right? Refer people visiting your page to one of those money for clickthrough sca^H^H^Hprograms. Selling T-shirts or something may come to mind, but watch out: selling anything tangible usually requires a state seller's permit.

So your business could write open source software that attracts people to come to your website, which you make money on. That may not sound like such a hot business plan, but these days, believe me, that and a snappy domain name will get you $15 million in venture capital. =^)

As always, check your local laws and seek expert advice, because this ain't it: I'm not a lawyer or a tax expert. I'm not even a business owner, in fact, I just found out this stuff when I was looking into the subject a few months ago. In any case, good luck!

Reasonable ad broker for such an endeavour?

[Eivind Eklund]

In order to get this going for an initially small open source project, you'd need an ad broker that is willing to sell in a small website - probably one that would be willing to put up with sites doing network ads only.

Does anybody know of such a broker?

Eivind.

IANATA

[Mark F. Komarinski]

I am not a tax advisor, lawyer, related to the IRS in any way (cept for some relatives that work at the treasury dept), so don't sue me if I'm wrong. And I probably am.

There, got that out of the way. You can dedict hobbies as long as at some point you make a profit. Typically this is making a profit 3 out of 5 years (or at least that keeps the IRS from tossing you in the "sign Mr X. up for an audit" pile"). In my case, I write books and online articles about Linux. So, I'm able to deduct things like my shiny copies of RedHat, my 'net connection, and so on.

Re:Reasonable ad broker for such an endeavour?

[Jahf]

Get a couple of other people who want to run the same sca^H^H^H program (blatant steal) and have them run ads on your site while you run ads on their site.

Perhaps something like an OpenSourceTaxRing ... each person "pays" money to another site to run the ad and in return receives the same amount divided by the number of participants.

Revenue but outflow equals inflow.

Re:Still on your taxes, and you must seek a profit

[bradleyjg]

Just make sure you don't take a home office deduction (that is decide part of your house is really an office and have the company pay you rent.) This is a giant red flag, and virtually an invitation to be audited.
Bradley

List of brokers

[Eivind Eklund]

I checked outside Slashdot (with a friend who runs a commercial web site of a similar type) - he recommended

• TeknoSurf.com [teknosurf.com] (has moved to www.advertising.com [advertising.com] - you'll get a redirect)
  
  • A mix of pay per clickthrough and pay per banner, with mainly pay per click
  • Minimum 1000 impressions per month
• ValueClick [valueclick.com]
  • Pay per click only
  • Minimum 15000 impressions per month
• CyberBounty [cyberbounty.com]
  • Seems to be pay per user that accept free stuff from sponsors through them, or buy stuff from sponsors (mostly the former)
  • Minimum 350 unique visitors per day

as some he's had good experience with for this type of use.

Eivind.

Maybe your time.

[bluGill]

You probably can't do a buisness. However, since you are donating your time, this can probably count. I don't know if your time is deductable, but you can look into that angle.

If the judge ever sentences you to 180 hours of comunity service or something, you should be able to count this - but don't cheat or the judge will check up on you. (I'd say don't commit a crime, but with DVD and encryption, sometimes the crime is worth comitting as a protest means. But that is your buisness)

I am neither a lawyer or a tax advisor. These are to be taken as ideas to looked into further to see which if any are legal. They may not be legal.

Open Source IS a tax break

[pjbrewer]

Firms A and B are working on separate commercially viable projects. But they each need something the other has coded. Plan 1. A and B market their code. They sell their code to each other. The IRS gets a chunk of each firms profit on the deal. Plan 2. A and B just swap their code for free. Its not open source, they just swap. But they don't report this barter to the irs. The irs gives them a copy of Publication 525 [ustreas.gov] to read while they are in federal prison. Barter is income and is taxable, although there are usually bigger penguins to catch. Plan 3. A and B open source their code. Now they are giving away the code for free. And so they can grab each others code without earning income or creating tax consequences. If their releases are so buggy and obscure that no one else would want it, then it is effectively the same as Plan 2, without the taxes. Sounds like a tax break to me.

One important note

[vanguard]

It's been pointed out that if you want to be a business and you want to claim a loss you need to intend to turn a profit.

It's also been pointed out that you can turn a profit by selling banner ads.

Unless you actually intend to turn a profit you probably won't. If you can't be profitable for three of the last five years what you have is a hobby, not a business. (According to the IRS).

It's probably a good idea to just keep having fun writing code.

Sell documentation

[gunner800]

In the Open Source spirit, have documentation available free, but you could have bound, printed, and illustrated versions available at a profit.

-sig-