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Product & Business Income
You built something — an AI product, a SaaS, an API, an app — and it started earning. That is a different tax problem from a salary, and a much stranger one than most people expect, because the biggest cost in a software business is usually development — costs you actually pay out, not the value of your own unpaid time — and the rules about when you get to deduct those costs have changed more than once.
What We Cover
Everything that changes when your side project stops being a hobby.
What decides how your development costs are deducted
In a software business the largest cost is usually development, and *when* you get to deduct it — not how much you spent — is what drives the first year's bill. A short list of questions settles it, and most founders have never been asked any of them.
Where was the work performed?
Domestic and foreign research are recovered under different rules and over different periods. For a founder who contracts developers overseas this is frequently the single largest factor, and it surprises people who assume where their company is registered matters more than where the work happened. It does not.
Which tax year did the cost fall in?
The treatment of domestic research changed for tax years beginning after 2024, and the years before that were treated differently again. An identical cost incurred two years apart can be recovered on completely different schedules, which is why last year's advice may not be this year's answer.
Was an election made, and was it made in time?
You may be able to elect to spread a cost rather than deduct it immediately, and occasionally that is the better outcome. Elections of this kind are generally made on a timely-filed return, so the window closes quietly and without notice.
Did you actually pay the cost, or was it your own time?
A sole proprietor deducts what they pay out. There is no deduction for the value of your own unpaid hours, however many of them the product took. Founders consistently overestimate their deductible cost for exactly this reason, and discover it at the worst moment.
Are you eligible to revisit earlier years?
Smaller businesses may be able to reopen prior years under transition rules and recover costs that were capitalized when the older regime applied. Whether that is worth doing depends on what was already claimed and on how much is sitting unrecovered.
Common Questions
I am on an H-1B. Can I run my own product business on the side?
That is an immigration question rather than a tax one, and we answer it the same way every time: we do not. An H-1B is tied to a specific employer and a specific role, and whether a particular activity counts as unauthorized employment is a question for an immigration attorney. The consequences of getting it wrong are immigration consequences, not tax ones, and they are far more serious than any tax bill. What we can tell you is that the tax treatment does not depend on the answer — income is reportable whether or not the work that produced it was authorized. If you are unsure where you stand, speak to an immigration attorney first and bring us in once you know.
Should I set up an LLC?
Often, but rarely for the reason people expect. A single-member LLC does not by itself change your federal income tax — by default it is taxed exactly as if you had no entity at all. What it changes is liability, how you look to customers and platforms, and the door it opens to an S-corp election later, which can reduce self-employment tax once profit is consistently high enough to justify the payroll overhead. That election has a tradeoff worth knowing up front: it forecloses Qualified Small Business Stock treatment, since QSBS requires C-corporation stock, which matters if the business might ever raise outside money or be sold. Setting one up too early adds cost and paperwork for no tax benefit.
Do I have to charge sales tax on a SaaS product?
It depends on the state, and the states genuinely disagree. Some tax software-as-a-service, some tax downloaded software but not hosted, and some tax neither. The obligation you are most likely to have first is in your own state — physical presence there creates nexus from your first dollar of sales, with no threshold at all. Beyond your home state, your obligation generally starts once your sales or transaction volume in that state crosses its threshold — which means a product with customers everywhere can acquire obligations in places you have never been. This is worth mapping once, early, rather than discovering during diligence.
I sell to customers in Europe. Does that create a VAT obligation?
Selling digital services to consumers in the EU or UK can create a VAT registration obligation from the very first sale, with no small-seller threshold of the kind U.S. sellers expect. Selling to businesses generally works differently. Most solo founders discover this late, and the simplified registration schemes exist precisely to make it manageable. If you have EU or UK consumer revenue, raise it with us early.
My Stripe 1099-K is larger than the money I actually received. Why?
Because it generally reports gross payment volume — before processor fees, refunds, chargebacks, and platform cuts. That is not an error, and the fix is not to leave it off your return. Report the gross figure as income, then deduct the fees, refunds, and chargebacks as business expenses, so your return reconciles to the same number the IRS already has on file. Reporting only your net proceeds and omitting the gross figure is what invites a mismatch notice — keep the reconciliation on hand so the deduction is easy to explain.
Get the structure right early
Entity, deduction timing, and sales tax are far cheaper to set up correctly than to unwind two years in. Send us your revenue, your development costs, and where the work was done, and we will work out your own numbers with you rather than leave you to guess at them.
Schedule ConsultationThis page is not immigration advice
We are tax accountants, not immigration attorneys. Where this page mentions a visa or residency status, it is explaining how that status affects a tax question — not assessing your work authorization, your eligibility, or what any of it means for an application. Those consequences are more serious than tax ones and depend on facts we do not evaluate. Please speak with a licensed immigration attorney before acting on anything that touches your status, and bring us in once you know where you stand.