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TuFFLabs

This comprehensive analysis covers the initial expenditures, entity selection, medical device classification, and executive compensation strategies for TuFFLabs. Explore the benefits of forming a C-Corp, the classification of medical devices, and the comparison between NQSO and ISO. Also, discover the advantages of buyout arrangements.

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TuFFLabs

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  1. TuFFLabs Dominic Bernetti, Jennifer Davis, Jason Marthe, Lindsay Clouse, and Christopher Hall

  2. Initial Expenditures • Entity Selection Analysis • Medical Device Analysis • Executive Compensation Analysis Agenda

  3. Amortizable • Trade name - 15 years • Patent - 6 years • Work force - 15 years • Customer list - 15 years • Software - 15 years Depreciable • Lab equipment- 5 years • Lab building - 39 years Not Recoverable • Goodwill Initial Expenditures:Assets Acquired IRC §197 – Intangible Assets

  4. Initial Expenditures:Amortization & Depreciation *Goodwill not recoverable

  5. Organizational Expenditures ($25,000) • Deduction of $6,333 • Start-up Expenditures ($75,000) • Deduction of $5,000 • Patents • Internally created ($900,000 expensed) • Purchased ($4,000,000 amortized over 8 years) • Annual amortization = $500,000 Initial Expenditures:Additional Expenditures IRC §248 IRC §195 Reg§ 1.174-2

  6. Initial Expenditures:Research and Development IRC §174

  7. Depreciation • Amortization • Organizational Exp. • Start-up Exp. • Research & Development Total 2,802,564 1,493,334 6,333 5,000 5,000,000 $ 9,307,231 Initial Expenditures:Total Deductions

  8. 2015 $9,307,231 2016 $4,302,231 2017 $4,302,231 2018 $4,302,213 2019 $4,302,213 2020 $1,602,231 Total $28,118,386 Initial Expenditures:Deductions over 6 years

  9. Single Member Limited Liability Company (SMLLC) • 50% * 18,000,000 = $9,000,000 • 25,000,000 - 9,000,000 = $16,000,000 • 16,000,000 * 14% = $2,240,000 C-Corp • 5,000,000 * 6% = $300,000 (TuFFLabs) • 20,000,000 – 9,000,000 = $11,000,000 • 11,000,000 * 14% = $1,540,000 (TuFFPeach) Initial Expenditures:Research Activities Credit IRC §41

  10. Entity Selection Analysis:SMLLC vs C-Corp

  11. Entity Selection Analysis:Income Tax Calculations

  12. Entity Selection Analysis:Income Tax Calculations

  13. Entity Selection Analysis:Income Tax Calculations

  14. Entity Selection Analysis:Income Tax Calculations

  15. Entity Selection Analysis:Income Tax Calculations

  16. Requirements • Primarily for use in a medical institution • Implanted, inserted, or administrated by a medical professional • Typically not affordable by general public What does not constitute a medical device? • Regularly available for purchase/use by individuals • Easily accessible • Safely and effectively used without a medical professional Excise Tax is 2.3% of sale price Medical Device Analysis:Classification IRC §4191 Reg §48.4191-1 & 2

  17. Diet Planner (not a medical device) • Will be sold at retail stores • No special skills to read device • Tricord- Scanner (medical device) • Sold primarily in doctors office • Needs doctor to read information • Knee Mobilizer (medical device) • Needs prescription from doctor, not easily accessible • Very expensive and not meant for the average consumers Medical Device Analysis:TuFFLabs Products

  18. Incentive Stock Option (ISO) • Nonqualified Stock Option (NQSO) • Similarities • Tool to increase executive interest and stake in company • Value must be greater than or equal to FMV of the current stock price Executive Compensation Analysis:NQSO vs ISO IRC §421 IRC §422 CCH. Employee Benefit Analysis ¶106,034

  19. NQSO • Any entity • Used when ISO requirements not met • Requirements set by company ISO • Corporation only • Shareholders approve within 1 year • After approval, must be granted within 10 years. • Not exercisable after 10 years • Non -transferable (Except in special cases) Executive Compensation Analysis:NQSO vs ISO IRC §421 IRC §422 CCH. Employee Benefit Analysis ¶106,034

  20. Executive Compensation Analysis:Tax Comparison IRC §421 IRC §422 CCH. Employee Benefit Analysis ¶106,034

  21. Executive Compensation Analysis:Tax Comparison IRC §421 IRC §422 CCH. Employee Benefit Analysis ¶106,034

  22. Why do a buyout arrangement? • Scenario of $5,000,000 for 5 key employees • 1,000,000* 20% = 200,000 • Excess = $4,800,000 • Tax = $960,000 (20% of excess) • 200,000* 20% = 40,000 • Excess = $4,960,000 • Tax = $992,000 (20% of excess) • Recommendation Executive Compensation Analysis:Buyout Arrangements CCH Employee Benefits Analysis ¶111,130

  23. Deductions from initial expenditures: $28,118,386 • Recommend forming TuFFLabs as a C-Corp • Two of the three products considered medical • The difference between NQSO and ISO • Buyout Recommendation Review

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