Converting Costs to Cash: R&D Tax Credits for Startups

1. Converting Costs to Cash:R&D Tax Credits for Startups Joel Cardis, Esquire Joel Cardis Consulting Helping Emerging Companies Emerge www.CardisConsulting.com jcardis@CardisConsulting.com 215-654-8246

2. Joel Cardis, Esquire • Lead author, Venture Capital: The Definitive Guide for Entrepreneurs, Investors and Practitioners • Advisory Board, Regional Biotechnology Council • Member, Greater Philadelphia Venture Group • Member, Eastern Technology Council • Judge, Angel Venture Fair • Former Executive in Residence, Port of Technology

3. What do you mean by “startup?” • A company developing a new technology that hasn’t become profitable –yet!

4. What Are Research & Development Tax Credits? • Qualified Expenses • For Research & Development • Approved for Tax Credit Status

5. Why They Help Startups • Turn Costs to Cash • No Debt • No Equity Dilution • No bearing on Federal Taxes*

6. What Kinds of Expenses Qualify for PA’s Credits? • PA R&D Wages • PA R&D Supplies • PA Contract Research Expenses (?)

7. What Expenses Are Considered R&D? • Purpose to discover technological information • Intended to be useful in development of new or improved “business component” • Not GSA • Not customer support

8. How Do Expenses Get Approved for Tax Credits? • Identify Appropriate Expenses • Submit Application for Tax Credits to Department of Revenue

9. What kinds of companies can qualify? • Statute is Industry Neutral • R&D Expenses • Expended in PA • Subject to PA taxes • In existence for >1 tax years prior to application year

10. The Statutory Formula • PA R&D Tax Credit = 10% x (Current PA Qualified R&D Exp. – PA Base Amount) • PA Base Amount = Fixed Base Percentage x Avg. Preceding 4 Yrs Annual Gross Receipts • Fixed Base Percentage =Preceding 4 Years PA Qualified R&D Expense Preceding 4 Years Gross Receipts

11. The Administrative Formula(?) • PA R&D Tax Credit = 10% x (Current PA Qualified R&D Exp. – Average of up to 4 Prior Years’ PA Qualified R&D Expense)

12. Tax Credit Timeline • Year 1 - Incur R&D Expenses • Year 2 - Incur More R&D Expense • Year 3 - • Apply for Credits by 9/15 • Receive Credits by 12/15 • Year 4+ - Sell credits and get approval of sale

13. The Tax Credit Process

14. End-to-End Program Identify expenses Prepare and submit application Manage approval process Market and sell credits Manage settlement process Handle settlement upon sale Submit sale for approval Manage approval process Credit Conversion Program Market and sell credits Manage settlement process Handle settlement upon sale Submit sale for approval Manage approval process Tax Credit Planning Set up record keeping to better capture qualified expenses Plan expenditures to increase amount of qualified expenses Costs to Cash Program

15. Thank You! Joel Cardis, Esquire (215)654-8246 jcardis@CardisConsulting.com www.CardisConsulting.com