Tax Planning Basics

TAX PLANNING PHILOSOPHY

Understanding Tax as Strategic Value Creation

TAX PLANNING FUNDAMENTALS

WHY TAX PLANNING MATTERS:
☐ Preserves value for shareholders
☐ R&D credits can be significant
☐ Exit planning requires early setup
☐ Multi-state complexity grows fast
☐ Compliance failures are costly

CEO'S ROLE IN TAX:
☐ Ensure proper entity structure
☐ Understand key tax benefits (QSBS, R&D)
☐ Oversee compliance
☐ Plan early for exits
☐ Work with qualified tax advisors

THE TAX REALITY:
"Tax planning isn't about avoidance—it's
about structuring properly to capture
benefits you're entitled to. Poor planning
can cost millions at exit."

TAX PLANNING TIMELINE:
Before founding: Entity structure, state selection
At founding: QSBS setup, 83(b) elections
Growing: R&D credits, state nexus
Pre-exit: QSBS verification, structure planning
At exit: Maximize after-tax proceeds

COMMON TAX MISTAKES:
☐ Wrong entity type (LLC vs C-Corp)
☐ Missing 83(b) election deadline
☐ Not claiming R&D credits
☐ Ignoring state nexus
☐ Not verifying QSBS qualification
☐ Poor exit structure planning

KEY TAX CONCEPTS FOR STARTUPS:
1. QSBS: Up to $10M tax-free gain per holder
2. R&D Credits: Offset payroll or income tax
3. 83(b) Election: Convert ordinary to cap gains
4. State Nexus: Where you owe state taxes
5. 409A Valuation: Required for option pricing

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COMPREHENSIVE TAX PLANNING FRAMEWORK

Tax Planning Checklist

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TAX PLANNING BASICS
═══════════════════════════════════════

COMPANY: _______________
Tax Year: _______________
Tax Advisor: _______________

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SECTION 1: ENTITY STRUCTURE
═══════════════════════════════════════

ENTITY TYPE:
Current entity: ☐ C-Corp ☐ S-Corp ☐ LLC ☐ Other

C-CORP BENEFITS FOR VC-BACKED:
☐ Preferred by VCs (familiar structure)
☐ Qualified Small Business Stock eligible
☐ Clear equity incentive structure
☐ Easier for M&A transactions

INCORPORATION STATE:
Incorporated in: ☐ Delaware ☐ Other: _____
Headquarters in: _______________
Why Delaware?
☐ Business-friendly courts
☐ Predictable corporate law
☐ VC/investor expectation
☐ Established case precedent

QUALIFIED SMALL BUSINESS STOCK (QSBS):
QSBS allows up to $10M or 10x basis
exclusion from federal capital gains tax

QSBS REQUIREMENTS CHECKLIST:
☐ C-Corporation (not S-Corp, LLC)
☐ Gross assets ≤$50M when stock issued
☐ Active trade or business (80%+ assets)
☐ Not excluded industry
   (finance, farming, mining, hospitality)
☐ Stock held 5+ years
☐ Stock acquired at original issuance

QSBS VERIFICATION:
| Requirement | Status | Evidence |
|-------------|--------|----------|
| C-Corp at issuance | ☐ Y ☐ N | |
| Assets <$50M | ☐ Y ☐ N | |
| Active business | ☐ Y ☐ N | |
| Eligible industry | ☐ Y ☐ N | |
| Original issuance | ☐ Y ☐ N | |
| 5-year hold | ☐ Y ☐ N | Start: ___ |

═══════════════════════════════════════
SECTION 2: FOUNDER/EMPLOYEE TAX
═══════════════════════════════════════

83(b) ELECTION:
Purpose: Elect to be taxed on restricted
stock at grant (not vesting), converting
future gains from ordinary to capital

83(b) CHECKLIST:
☐ Election filed within 30 days of grant
☐ Copy kept for records
☐ Copy filed with tax return
☐ Copy sent to company

83(b) TRACKING:
| Person | Grant Date | File Date | FMV | Status |
|--------|------------|-----------|-----|--------|
| | | | $ | ☐ Filed ☐ Missed |
| | | | $ | ☐ Filed ☐ Missed |
| | | | $ | ☐ Filed ☐ Missed |

409A VALUATION:
Purpose: Establish fair market value for
option strike prices (avoid tax penalty)

409A REQUIREMENTS:
☐ Independent valuation at least annually
☐ Updated after material events
☐ Options priced at or above 409A FMV
☐ Documentation maintained

409A SCHEDULE:
| Valuation Date | FMV/Share | Provider | Valid Until |
|----------------|-----------|----------|-------------|
| | $ | | |
| | $ | | |
| | $ | | |

MATERIAL EVENTS TRIGGERING NEW 409A:
☐ Equity financing round
☐ Significant revenue change (>50%)
☐ Major contract wins/losses
☐ M&A discussions
☐ Key executive changes

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SECTION 3: R&D TAX CREDITS
═══════════════════════════════════════

R&D CREDIT OVERVIEW:
Federal credit: Up to 20% of qualified expenses
Can offset: Income tax or payroll tax (if <$5M revenue)
Carryforward: 20 years

QUALIFYING ACTIVITIES:
☐ Developing new products/features
☐ Improving existing products
☐ Developing new processes
☐ Software development
☐ Engineering/design work

QUALIFYING EXPENSES (QREs):
| Category | Included | Not Included |
|----------|----------|--------------|
| Wages | Engineers, QA, PMs | Sales, Marketing |
| Supplies | Lab materials | Office supplies |
| Cloud | R&D infrastructure | Production hosting |
| Contract | 65% of US contractors | Foreign contractors |

R&D CREDIT CALCULATION:
┌─────────────────────────────────────┐
│ TAX YEAR: _______________           │
│                                     │
│ QUALIFIED EXPENSES:                 │
│ Employee wages:        $___________ │
│ × Qualifying %:        ___%         │
│ = Qualified wages:     $___________ │
│                                     │
│ Supplies:              $___________ │
│ Cloud (R&D portion):   $___________ │
│ Contract R&D (×65%):   $___________ │
│ ─────────────────────────────────   │
│ Total QREs:            $___________ │
│                                     │
│ CREDIT CALCULATION:                 │
│ Method: ☐ Regular ☐ ASC             │
│                                     │
│ Alternative Simplified Credit (ASC):│
│ Current year QREs:     $___________ │
│ Prior 3-year avg QREs: $___________ │
│ Excess QREs:           $___________ │
│ × 14%:                 $___________ │
│ = Federal R&D Credit:  $___________ │
│                                     │
│ State R&D credits:     $___________ │
│ ─────────────────────────────────   │
│ TOTAL R&D CREDITS:     $___________ │
└─────────────────────────────────────┘

PAYROLL TAX OFFSET:
(For companies with <$5M revenue and <5 years old)
☐ Eligible for payroll tax offset
☐ Can offset up to $500K/year FICA
☐ Carry forward unused amounts

DOCUMENTATION REQUIREMENTS:
☐ Project descriptions documented
☐ Time tracking by project
☐ Technical uncertainty documented
☐ Experimentation process recorded
☐ Business component identified

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SECTION 4: STATE TAX CONSIDERATIONS
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STATE NEXUS ANALYSIS:
Nexus = Connection requiring tax filing

COMMON NEXUS TRIGGERS:
☐ Physical office location
☐ Employees working in state
☐ Remote employees (varies by state)
☐ Inventory stored in state
☐ Significant sales to state

STATE FILING STATUS:
| State | Nexus Trigger | Filing Req | Status |
|-------|---------------|------------|--------|
| | | ☐ Y ☐ N | ☐ Current ☐ Review |
| | | ☐ Y ☐ N | ☐ Current ☐ Review |
| | | ☐ Y ☐ N | ☐ Current ☐ Review |
| | | ☐ Y ☐ N | ☐ Current ☐ Review |
| | | ☐ Y ☐ N | ☐ Current ☐ Review |

REMOTE EMPLOYEE CONSIDERATIONS:
| State | # Employees | Income Tax | Sales Tax | Workers Comp |
|-------|-------------|------------|-----------|--------------|
| | ___ | ☐ Req | ☐ Req | ☐ Req |
| | ___ | ☐ Req | ☐ Req | ☐ Req |
| | ___ | ☐ Req | ☐ Req | ☐ Req |

STATE R&D CREDITS:
Many states offer additional R&D credits
| State | Credit Rate | Eligible | Amount |
|-------|-------------|----------|--------|
| CA | 24% | ☐ Y ☐ N | $_____ |
| NY | 6-9% | ☐ Y ☐ N | $_____ |
| MA | 10% | ☐ Y ☐ N | $_____ |
| Other | | ☐ Y ☐ N | $_____ |

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SECTION 5: COMPLIANCE CALENDAR
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FEDERAL TAX DEADLINES:
| Filing | Due Date | Status |
|--------|----------|--------|
| Q1 estimated (1120-W) | Apr 15 | ☐ |
| Q2 estimated | Jun 15 | ☐ |
| Q3 estimated | Sep 15 | ☐ |
| Q4 estimated | Dec 15 | ☐ |
| Corporate return (1120) | Apr 15 | ☐ |
| Extension (if filed) | Oct 15 | ☐ |
| Payroll (941) | Quarterly | ☐ |
| 1099s | Jan 31 | ☐ |

STATE TAX DEADLINES:
| State | Filing | Due Date | Status |
|-------|--------|----------|--------|
| | Income | | ☐ |
| | Franchise | | ☐ |
| | Sales | | ☐ |

PAYROLL TAX COMPLIANCE:
☐ Federal withholding deposited timely
☐ State withholding deposited timely
☐ 941 quarterly returns filed
☐ State unemployment filed
☐ Annual W-2s/W-3 filed (Jan 31)
☐ 1099s for contractors filed (Jan 31)

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SECTION 6: EXIT TAX PLANNING
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EXIT TAX CONSIDERATIONS:

QSBS BENEFIT CALCULATION:
Number of QSBS-eligible holders: _____
Estimated per-person exclusion: $10M or 10x basis
Total potential tax savings: $_____

DEAL STRUCTURE IMPACT:
| Structure | Tax Impact | Preference |
|-----------|------------|------------|
| Stock sale | Cap gains, QSBS possible | Buyer preferred |
| Asset sale | Ordinary income (some) | Seller preferred |
| Merger | Usually cap gains | Depends |

PRE-EXIT CHECKLIST:
☐ QSBS qualification verified
☐ 5-year holding period confirmed
☐ 83(b) elections documented
☐ Stock records clean
☐ State tax impact modeled
☐ Deal structure negotiated
☐ Tax advisor engaged early

Tax Planning Summary

Area	Status	Action Needed	Priority
Entity structure	☐ Optimal ☐ Review		H/M/L
QSBS qualification	☐ Yes ☐ No ☐ Check		H/M/L
83(b) elections	☐ All filed ☐ Missing		H/M/L
409A valuation	☐ Current ☐ Needed		H/M/L
R&D credits	☐ Claiming ☐ Not		H/M/L
State nexus	☐ Addressed ☐ Review		H/M/L
Compliance	☐ Current ☐ Behind		H/M/L

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