a ccounting for emerging startups amy yue, cpa, cma, quickbooks proadvisor (510) 580-8166...

ACCOUNTING FOR EMERGING STARTUPS

Amy Yue, CPA, CMA, QuickBooks Proadvisor(510) 580-8166

amyyue@cpainsight.comwww.cpainsght.com November 12, 2014

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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.

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AgendaSection 1 - Financing• Business Plan• Financial ProjectionSection 2 - Hiring• Independent Contractor vs. Employee• Payroll TaxesSection 3 - Accounting• Capital Assets• Intellectual PropertiesSection 4 - Q&A

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Section 1 - Financing• From Ideas to Success

Idea

Startup Growth

M&A/IPOFinancing – Seed, Series

A, B, C, etc.

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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

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Financial Projection

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

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Section 2 - HiringIndependent Contractor Vs. Employee

Company controls the results of the work; Work is done by worker without daily supervision

Behavior Company controls what worker does and how worker does his/her job

Worker invests in facilities and tools

Financial Company provides tools, equipment, material; work place is company’s office

Project based engagement; No benefits provided by the Company

Type of Relationship Work is part of regular business; continuous working relationship; employee-type benefits

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Payroll Taxes

Wage Limit Employer Pays Employee Pays Total Max AmountFederal Taxes

FICA - Social Security Tax $117,000 for 2014 6.20% 6.20% 12.40%$14,508 for

2014FICA - Medicare Tax no limit 1.45% 1.45% 2.90% N/A

FICA - Additional Medicare Tax

Wages > $200k for Single;Wages > $250k for

Married Filing Jointly - 0.90% 0.90% N/A

FUTA - Federal Unemployment $7,000 0.6%

+credit reduction (0.9%) - 1.50% $105 FIT - Federal Income Tax no limit - IRS withholding Table N/A N/AState Taxes

SUI - State Unemployment Insurance $7,000 3.4% new employer - 3.40% $238 ETT - Employment Training Tax $7,000 0.10% - 0.10% $7

SDI - State Disability Insurance $101,636 for 2014 - 1% 1%$1,016 for

2014PIT - Personal Income Tax no limit - CA withholding Table N/A N/A

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Section 3 - AccountingFinancial Statements Vs. Tax Return

Reports for Management and Investors

Audience Reports for IRS and State tax authority

Present the performance of the operation & book value of the Company

Purpose Pay the lowest amount of taxes allowable by law

GAAP (Generally Accepted Accounting Principles)

Applicable Rules Internal Revenue Code; State Revenue and Taxation Code

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Capitalization vs. ExpenseAsset Expense

Useful life is more than 1 year Regular cost of keeping business

Will generate benefit in future years NA

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.

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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).

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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

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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 - $100,000Tax Treatment:R&D Deduction $120,000

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Accounting & Tax ComparisonAccounting Tax

Revenue $200,000 Revenue $200,000

Depreciation Expense ($1,586) Section 179 Deduction

($11,100)

R&D Expense ($100,000) R&D Deduction ($120,000)

Profit $98,414 Taxable Income $68,900

Email: info@cpainsight.com

THANK YOU!

CPA Insight, Inc.www.cpainsght.com

Amy Yue, CPA, QB ProAdvisor Tingting Pan, CPA(510) 580-8166 (408) 391-0550amyyue@cpainsight.com tingtingp@gmail.com