Tax write offs can be a huge help when your game dev business is getting started. As discussed in a previous article you can only write off expenses if you decide to treat it like a business.
If you’ve worked out your status, or perhaps to help you figure it out, let’s explore some write off options. While the total dollar amount may not be super high, there are a lot of overlooked expenses in this realm.
All my articles have that standard disclaimer below, but with this one, I want to be clear that I recommend working with a pro on your taxes. Unfortunately a lot of pro’s are going to either over charge or under deliver (or both). So my main goal is to empower you to converse more intelligently with your CPA. Or if you are set on doing it yourself, hopefully this will give you some new ideas to dig a little more into.
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Tax Impact
It’s worth throwing a quick refresher in here about what exactly it means to write something off of your taxes. The most important item to remember is that a write off does not translate to a tax credit. For example, if you made $100, you might owe $20 in taxes. If you had a $10 write off, it doesn’t cut the owed taxes in half. Instead it takes $10 off of the $100 you made. Now the government treats your income as if it were $90, and you only own $18 in taxes.
Another key item to remember is that many tax write offs can only apply if your total business income is greater than your total write offs.
Partial vs Full Write Offs
Business expenses fall into two buckets: Partially expensable and fully expensable. With a game dev side hustle, most of your expenses will be in this fuzzy, partial-personal-usage space. The percent of an expense you can write off is the same as the percentage of time used for business. If a given asset is used 20% of the time for business, then you take your purchase price, and write off 20% of that. Many items may still be at 100% business utilization, but you’ll have to calculate that on an expense by expense basis. For those that are clearly a full expense, write it off and enjoy the savings!
When calculating the partial usage percent, I’d recommend being on the cautious side. For example, say you predict your new $400 Oculus Quest will be 50% to 75% business. That translates to a write off of $200-$300. A difference of only $100. Since that’s a write off and not a credit, we’re actually talking about saving you around $20-$30 on your taxes. Is $20 worth getting the IRS breathing down your neck? If the expenses were larger in this field, it might be worth really fine-tuning that percentage. But for what we’re talking about, I’d just work out something rough, and round down.
Below are the items I could think of, broken into various categories. Some items may actually fall into more than one bucket, so be sure to explore all possibilities for how to write something off.
Home Office
The home office is one that is never fully expensable (you can’t write off our whole house!), and often not expensable at all. It is one of the toughest items to get a partial write off from. One key reason is that your home office must be used “exclusively and regularly” for this business. So you can’t write off the couch area you sit in to sometimes watch TV and sometimes laptop-dev. You can’t write off the office room either if you use that room for other things at other times. You also can only write this expense off if this expense does not take your profit into the negative.
When doing the calculation, you have two methods. One is calculate all your home expenses (mortgage, utilities, taxes, etc.), calculate what percentage of your home that the office takes up, then multiply those. The simpler option is to just go with $5 per square foot of office space. Most pro’s would recommend you calculate both and see which one comes out ahead. I leave that choice to you.
Game Deployment Devices
This bucket of items consists of things you test your game on. If you can’t load your game on your Xbox, then it doesn’t fall in this category. For these, I’m just looking at what percentage of the devices usage is spent testing your game.
- Cell phones not used by anyone as phones. These would be phones you got somehow just to test a mobile game on. These can easily be 100% deducted.
- Cell phones used as phones. Here things get fuzzy. Using your phone as a deployment device is fine, but odds are this will be a very small deduction. Keep in mind your personal phone is technically in use 24/7. so if you use it to test a game one hour per week, that’s only half a percent.
- Dev-kits. Many consoles and VR rigs have dev-kits available to people in their developer programs. Many of these cannot actually play off the shelf games. If you have a dev kit like that, you’re in the clear for a 100% write off. If it can play games, it’s percentage time.
- Retail game hardware. This would again be items like consoles or VR rigs. Some of these allow you to upload in-dev games, some don’t. If they don’t, obviously you aren’t testing your game on it. If they do, make sure you’re actually utilizing that before you start asking Uncle Sam for some savings.
Game Research
Here is a special bucket just for game developers: researching the competition. It’s not your fault that this part of the job is fun, but you do need to be careful to actually count which parts of this are just for fun, and which parts are for business. It’s also helpful to be somewhat honest about the scope of reasonable research.
- Hardware: retail game systems, VR rigs, cell phones, handheld devices. There’s a long list of items that could fall in here. You need to be careful not to go overboard expensing these things. Odds are it should be a platform you plan to deploy your game to. This area is especially viable if you can use the same hardware for research as for testing deployments.
- Games. These should fall into the “reasonable research” area I mentioned above. If you’re making a small puzzle game for mobile, you probably don’t need to play Call Of Duty for research. If you’re researching how other puzzle games monetize however, you may actually need to drop some cash on IAP to get that figured out.
Development Needs
These are the things you need to actually do the game-creation.
- Asset store or marketplace purchases of assets.
- Development software such as Jetbrains Rider or Shadron.
- Computer. This is the one that will probably not be at 100% unless you buy yourself a business-only computer that you don’t use for personal work. With an expense as large as a computer, do note that you can choose between a one-time writeoff and an over-time depreciation schedule.
Businessy Things & Infrastructure
This category is the most straightforward to expense at 100%. It’s anything that is purely needed to support the business and is completely useless to you outside that context.
- A website. This includes the underlying needs (domain registration, hosting, SEO software) as well as front-end aspects (paying for content, design, art). Clearly 100%
- Game-connected web infrastructure. Multiplayer servers, player ranking, online backup, etc. This is all the infrastructure your game actually needs to talk to.
- Marketing. Get the word out there however you can, and keep all the records.
- Office supplies. Pens, paper, whatever. Just don’t buy business notepads and have your kids use them as coloring books.
Limitations on Tax Savings
There are a few items above that may only be used if your final profit is positive. I haven’t gone into too much detail there because the point of this article is to help you not forget an expense come tax time. This article is a rough sketch to help you get your mindset tilted the way it needs to be. As you actually look to spend money, or do your taxes, please consult a CPA or other tax professional.
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