A CCOUNTING FOR EMERGING STARTUPS Amy Yue, CPA, CMA, QuickBooks Proadvisor (510) November 12, 2014

Disclaimer This presentation is intended to provide general rules of US GAAP and US tax. Nothing contained in this presentation was intended to be used or can used by any taxpayer for the purpose of be avoiding penalties under the Internal Revenue Code of 1986, as amended. A taxpayer should seek advice of a qualified professional with respect to any transaction or matters contained in this presentation. The content is intended to be a general overview of the subject matter covered and is educational and informational only. 2

Agenda Section 1 - Financing Business Plan Financial Projection Section 2 - Hiring Independent Contractor vs. Employee Payroll Taxes Section 3 - Accounting Capital Assets Intellectual Properties Section 4 - Q&A 3

Section 1 - Financing From Ideas to Success 4 Idea Startup Growth M&A/IPO Financing – Seed, Series A, B, C, etc.

Business Plan Executive Summary Company Description Industry Analysis and Trends The Target Market and the Competition Marketing Plan and Sales Strategy Operations Management and Organization Development, Milestones & Exit Plan The Financials 5

Financial Projection Business Plan Assumptions Start Up Cost Sales/Operating Expenses Balance Sheet Income Statement Statement of Cash Flows 6

Section 2 - Hiring Independent ContractorVs.Employee Company controls the results of the work; Work is done by worker without daily supervision BehaviorCompany controls what worker does and how worker does his/her job Worker invests in facilities and tools FinancialCompany provides tools, equipment, material; work place is company’s office Project based engagement; No benefits provided by the Company Type of RelationshipWork is part of regular business; continuous working relationship; employee-type benefits 7

Payroll Taxes Wage LimitEmployer PaysEmployee PaysTotalMax Amount Federal Taxes FICA - Social Security Tax$117,000 for % 12.40% $14,508 for 2014 FICA - Medicare Taxno limit1.45% 2.90%N/A FICA - Additional Medicare Tax Wages > $200k for Single; Wages > $250k for Married Filing Jointly-0.90% N/A FUTA - Federal Unemployment$7, % +credit reduction (0.9%)-1.50%$105 FIT - Federal Income Taxno limit-IRS withholding TableN/A State Taxes SUI - State Unemployment Insurance$7,0003.4% new employer-3.40%$238 ETT - Employment Training Tax$7, %- $7 SDI - State Disability Insurance$101,636 for % $1,016 for 2014 PIT - Personal Income Taxno limit-CA withholding TableN/A 8

Section 3 - Accounting Financial StatementsVs.Tax Return Reports for Management and Investors AudienceReports for IRS and State tax authority Present the performance of the operation & book value of the Company PurposePay the lowest amount of taxes allowable by law GAAP (Generally Accepted Accounting Principles) Applicable RulesInternal Revenue Code; State Revenue and Taxation Code 9

Capitalization vs. Expense AssetExpense Useful life is more than 1 yearRegular cost of keeping business Will generate benefit in future yearsNA Capitalized as Asset in Balance Sheet; Depreciate over the useful life Recorded as Expense in Profit and Loss Statement Example: Business vehicles, equipment, furniture, etc. Example: Rent, Utility, Office Supplies, Professional Fees, etc. 10

Accounting for FA & IP Fixed Assets – Provide economic benefit for a period greater than one year – Costs include Purchase price, Sales tax, Import duties, Freight and shipping insurance, Installation and setup costs, testing and reconditioning, etc. – Useful life – Depreciation Intellectual Property – IP – Patent, Copyright, Trademarks, Trade Secrets, Computer Programs – R&D are expensed as incurred regardless of the success of the R&D – Capitalize spending on Intangibles evolved from the result of R&D. (example: Capitalize Legal fees for obtaining a patent). 11

Example – On January 1, 2014, Company A Purchased a Research equipment at $10,000; Sales tax $950; Shipping $150; useful life 7 years with 0 Salvage value. Accounting Treatment: Machinery & Equipment - $11,100 (=$10k+$950+$150) Depreciation Expense - ($1,586) (=$11,100/7) Net Asset Value - $9,514 (=$11,100-$1,586) Tax Treatment: Section 179 Deduction $11,100 12

Example – Company A Paid a lawyer $20,000 for patent filing; Company A also paid employee salary of $100,000 to develop the patent. Accounting Treatment: Patent (Intangible Asset) - $20,000 R&D Expense - $100,000 Tax Treatment: R&D Deduction $120,000 13

Accounting & Tax Comparison AccountingTax Revenue$200,000Revenue$200,000 Depreciation Expense($1,586)Section 179 Deduction ($11,100) R&D Expense($100,000)R&D Deduction($120,000) Profit$98,414Taxable Income$68,900 14

T HANK YOU ! 15