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?"

Comments

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!