Presentation provides high level overview of 2018 Tax Reform changes may impact startups.

1. How 2018 Tax Reform May Impact Startups
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Stan Logan
Quality Back Office
StanL@goqbo.com
www.goqbo.com

2. How 2018 Tax Reform May Impact Startups
Background:
The Tax Cuts and Jobs Act, P.L. 115-97 was signed into law on December 22,
2017. First major tax legislations since 1986.
Changes to paychecks may not happen until February when the new
withholding guidance to business becomes effective.
Very little published by Treasury or IRS on how to apply the law so stay tuned.
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3. How 2018 Tax Reform May Impact Startups
Broad Implications:
No big reason to celebrate- Mixed views on long term impact.
Most of you are not paying Federal tax and are either LLC’s or S-Corps. If you
are a C-Corp, rate goes from 34+% to 21%.
Repatriation of overseas cash by “big tech” could push up multiples for
acquiring startups
More cash in the hands of wealthy fund managers will lead to more cash to
invest in startups
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4. How 2018 Tax Reform May Impact Startups
Broad Implications:
Curbing deductions for state and local taxes-
Makes Chicago more attractive for startups since IL rates are way lower than
Silicon Valley and making Chicago a cheaper place to do business will help
retain talent. Both Texas and Utah will become more attractive.
LLC’s and S-Corps should benefit from lower personal rates now at 39.6%
since 20% of pass-through income will be deductible as expense.
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5. How 2018 Tax Reform May Impact Startups
Pass Through Income Deduction:
An individual with “qualified business income” from a pass-through entity
will be allowed a 20% deduction from that income.
Not available to “specified services or businesses,” which means business
in legal, accounting, consulting, health, sports, financial services or
brokerate where the principal asset of the business in the reputation or
skills of the people who serve as employees.
Also not available to taxpayers with income above $157,000 or $315,000 for
joint filers with a phase out period.
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6. How 2018 Tax Reform May Impact Startups
Are C-Corps still attractive for startups?:
Still possible that high-growth, scalable and highly funded VC businesses
will still be better off as C-Corps.
1. Lower rate particularly if you invest profits back into the business, so
no double tax considerations
2. QSBS ( Qualified Small Business Stock (Subsection 1202) is retained-
means that owners in a C-Corps can exclude $10M or 10X aggregate
adjusted basis (whichever is higher) at the successful exit of the
business.
3. VC’s prefer Delware C-Corps- limits legal and regulatory complexity
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7. How 2018 Tax Reform May Impact Startups
Should Startups Now Change to C Corps?:
While rate reduction is attractive on its face, there are other considerations:
1. Need to file articles of incorporation with the secretary of state
2. Draft corporate bylaws
3. Elect corporate officers and directors
4. Hold annual meetings
5. Issue stock certificates
6. Two levels of tax- earnings and distributions (dividends)
7. This all could change when Democrats take control
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8. How 2018 Tax Reform May Impact Startups
Stock Compensation:
Good News For Stock Options- Subsection 83(i)
Nonqualified Stock Options (NSO’s) will no longer be immediately taxed
upon exercise. Rather the holder will have five years to sell the shares and
pay the taxes with some limitations. Not eligible for founders or the 4
highest compensated officers of the corporation each year.
IRC 83 (b) Restricted Stock Unit (RSU) holders will no longer be able to
accelerate taxation at vesting. They will have to wait until they sell their
vested RSU’s in order to pay more tax.
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9. How 2018 Tax Reform May Impact Startups
Alternative Minimum Tax:
Alternative Minimum Tax (AMT) threshold is going up for individuals and
removed for corporations. For startups, the bargain element from ISO’s
(Incentive Stock Options) that are now part of the AMT will increase tax
liability for far fewer people.
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10. How 2018 Tax Reform May Impact Startups
Depreciation:
Certain assets can now be fully expensed as depreciation when they are
purchased instead of capitalized and depreciated over the “useful life”. If
you are a startup with losses, you may wish to forgo this treatment in order
to preserve the ability to deduct depreciation in future profitable years.
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11. How 2018 Tax Reform May Impact Startups
Research and Development:
R&D credits can still offset payroll taxes. Certain startups can offset
up to $250,000 of payroll taxes per year with R&D Credits.
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12. How 2018 Tax Reform May Impact Startups
Net Operating Losses
NOL Deduction limited to 80% of net income-Means startups are taxpayers the
first year they have taxable income and won’t be able to offset prior loss
carryforwards 100%.
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13. How 2018 Tax Reform May Impact Startups
Meals, Entertainment and Moving Expense:
All employee meals will be limited to 50% deduction. Before, on site meals or
meals at company functions were 100% deductible.
Meals & Entertainment for customers will no longer be deductible..
No Employer deductions for transportation even though benefits will continue
to be tax exempt for employees except for bicycling commuter benefits.
Moving expense provided or reimbursed by company is income to employee.
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14. How 2018 Tax Reform May Impact Startups
Conclusion:
Whatever you think you may have learned from this presentation, don’t do
anything before speaking to your tax advisor! The specifics of your
situation really matters.
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