RSM McGladrey, Inc. is a member firm of RSM International – an affiliation of separate and independent legal entities.

Tax Help for Start Ups

Presented by Dan Wright and Nicole Wilson

Introductions

• Dan Wright, Business Tax

• Nicole Wilson, WA State Tax Specialist

Agenda

• The Do’s and Don’ts

• WA B&O Tax Changes

• Industry Examples

• Tax Relief

Three biggest issues

• Create and document clear founder, investor, and key employee arrangements

• Prepare for the next step

• Manage your risk

Founder, investor, and key employees arrangements

• Considerations:– Choice of legal entity– Owner agreements– Compensation arrangements– Joint venture arrangements

Prepare for the next step

• Considerations:– Know what you own and keep current documentation

(R&D, intangible characterization, building value)

– Representation and warranty • Tax deal killers (tax records and filings are not

current, under reported/not quantified)

Manage your risk (tax)

• Considerations:– Jurisdictional risk (sales/use tax, VAT, other foreign tax)– Documentation issues (invoice format, contract

considerations, resale certificates)– Understand options before assessing risk (voluntary

disclosure programs)– More disclosure is the trend

• FIN 48

What to expect…

• Federal income tax• State income or business & occupation tax• Payroll tax• Property tax• Sales & use tax

As technology changes, so do taxes…

• Expanded definition of digital goods• Online services now deemed retail sale• Requirement to file electronically• Amnesty for prior periods• Not all states define goods and services the same

Post July 26, 2009 Definitions of Digital Goods…• All digital goods delivered to a buyer in WA state

are subject to retail sales tax regardless of the method of delivery – Digital audio works– Digital audio visual works– Digital books– Other products delivered electronically

• Digital codes

Certain Online Services Now Deemed Retail

• Digital automated services– Services delivered electronically using one or more

software applications• Remote Access Software

– Allows a consumer the right to access prewritten computer software, where possession is maintained by the seller or third party

• Data processing services– Subject to RST if performed by an automated process

Scenario 1

• $2,000,000 revenue annually• One shop – Washington• 2 -4 employees• Platform – handheld• Unit Price - $ 1.99 per game

– Outright sale vs. 30/70 split between Iphone and Developer

IPHONE Developer

Scenario 2

• $2,000,000 revenue annually• One shop – Washington• 4 -6 employees• Platform – PC games

– Developer hosted/ ASP delivery• Unit Price - $10/month subscription

Ghost Hosts

Scenario 3

• $10,000,000 revenue annually• Develop 2 games per year• One shop – Washington• 60 employees• Platform – box distribution (Xbox, Wii, Sony)• Unit Price - $2,000,000 3 months after release and

$ .50 per game sold

Big Game Blowup

Is there any relief from tax?

• Sales & Use Tax Deferral

• Business & Occupation (B&O) Tax Credit for R&D spending

Sales & Use Tax Deferral

• What qualifies:– New structures or, expansion or renovation of qualified

buildings– Qualified machinery & equipment purchases

• For how long:– Life of the business if R&D activity continues– And if you complete your annual surveys

B&O Tax Credit

• Who qualifies:– Any person engaged in qualified research and

development in the 5 high technology areasAnd– Its research and development spending in the calendar

year for which the credit is claimed exceeds .92 percent of the person’s taxable amount for the same calendar year

• Example, for taxable income of $10,000,000, your R&D expenditures must exceed $92,000.

Tax Incentives – B&O Tax Credit Calculation

• Step 1: Determine the greater of the amount of qualified R&D expenditures or 80 percent of amounts received by a person other than a public educational or research institution in compensation for conducting R&D

Example:

2008 Sales $10,000,000$200,000 in R&D

spendingWholesaler (.484%)

Tax Incentives – B&O Tax Credit Calculation

• Step 2: Subtract .92 percent of the person’s taxable amount from amount determined in step one.

Example:

$200,000 R&D spending $ 92,000) X .92 $108,000

Tax Incentives – B&O Tax Credit Calculation

• Step 3: Multiply the amount determined in step two by:– For 2004 – 2006, the person’s average tax rate– For 2007, the greater of the person’s average tax

rate or .75 percent– For 2008, the greater of the person’s average tax

rate or 1 percent– For 2009, the greater of the person’s average tax

rate or 1.25 percent– For 2010 – 2015, the greater of the person’s average

tax rate or 1.5 percent

Example:

$108,000 X 1% $1,080

Questions?