TuFFLabsDominic Bernetti, Jennifer Davis, Jason Marthe, Lindsay Clouse, and Christopher Hall

Agenda

I. Initial ExpendituresII. Entity Selection AnalysisIII. Medical Device AnalysisIV. Executive Compensation Analysis

Initial Expenditures:Assets Acquired

IRC §197 – Intangible Assets

Initial Expenditures:Amortization & Depreciation

Acquired Value Amortization Acquired Value DepreciationTrade Name 1,000,000 66,667 Lab equipment 8,000,000 1,600,000Patent (6 years) 3,000,000 500,000 Lab building 4,000,000 102,564Work force 4,000,000 266,667 1,702,564$ Customer List 2,000,000 133,333Software 400,000 26,667

993,334$

Amortizable Assets Depreciable Assets

*Goodwill not recoverable

Initial Expenditures:Additional Expenditures

• 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 = $500,000IRC §248IRC §195Reg § 1.174-2

Initial Expenditures:Research and Development

Software Development Value R&D Expenses Depreciation

Wages 2,000,000 2,000,000 0

Supplies 1,000,000 1,000,000 0

Machinery 1,000,000 0 200,000

Product Development

Wages 1,000,000 1,000,000 0

Supplies 1,000,000 1,000,000 0

Machinery 2,000,000 0 400,000

Product Quality Testing

Wages 1,000,000 0 0

Supplies 500,000 0 0

Machinery 500,000 0 100,000

Product Manufacturing

Wages 2,000,000 0 0

Raw materials 1,000,000 0 0

Machinery 2,000,000 0 400,000

5,000,000$ 1,100,000$

Research Related Expenditures

IRC §174

Initial Expenditures:Total Deductions

Initial Expenditures:Deductions over 6 years

2015 $9,307,231

2016 $4,302,231

2017 $4,302,231

2018 $4,302,2132019 $4,302,213

2020 $1,602,231

Total $28,118,386

Initial Expenditures:Research Activities Credit

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)

IRC §41

Entity Selection Analysis:SMLLC vs C-Corp

SMLLC C-Corp

FilingTuFFPeach’s

1120Files 1120, Form 851 on TuFFPeach

Treatment of Losses

Netted against TuFFPeach’s

income

Losses carry over to future

years

Apportionment

Georgia factor: Sales

State A factors:Sales, Property,

Payroll

Not Relevant

Entity Selection Analysis:Income Tax Calculations

TuFFLabs TuFFPeach Total2015 (8,000,000) 50,000,000 42,000,000 2016 (4,000,000) 52,000,000 48,000,000 2017 (2,000,000) 54,000,000 52,000,000 2018 4,000,000 56,000,000 60,000,000 2019 6,000,000 60,000,000 66,000,000 2020 8,000,000 64,000,000 72,000,000

Taxable Income

Entity Selection Analysis:Income Tax Calculations

Income App. Percentage App. Amount2015 42,000,000 21.67% 9,101,400 2016 48,000,000 21.67% 10,401,600 2017 52,000,000 21.67% 11,268,400 2018 60,000,000 21.67% 13,002,000 2019 66,000,000 21.67% 14,302,200 2020 72,000,000 21.67% 15,602,400

Apportionment (Only for SMLLC)

Entity Selection Analysis:Income Tax Calculations

App. Amount State A Tax Rate Tax Liability2015 9,101,400 7% 637,098 2016 10,401,600 7% 728,112 2017 11,268,400 7% 788,788 2018 13,002,000 7% 910,140 2019 14,302,200 7% 1,001,154 2020 15,602,400 7% 1,092,168 Total 5,157,460$

Tax Liability for TuFFLabs if SMLLC

Entity Selection Analysis:Income Tax Calculations

Taxable Income State A Tax Rate Tax Liability2015 (8,000,000) 7% - 2016 (12,000,000) 7% - 2017 (14,000,000) 7% - 2018 (10,000,000) 7% - 2019 (4,000,000) 7% - 2020 4,000,000 7% 280,000 Total 280,000$

Tax Liability for TuFFLabs if C-Corp

Entity Selection Analysis:Income Tax Calculations

TuFFLabs TuFFPeach Total TuFFLabs TuFFPeach Total2015 637,098 2,268,000 2,905,098 - 3,000,000 3,000,000 2016 728,112 2,592,000 3,320,112 - 3,120,000 3,120,000 2017 788,788 2,808,000 3,596,788 - 3,240,000 3,240,000 2018 910,140 3,240,000 4,150,140 - 3,360,000 3,360,000 2019 1,001,154 3,564,000 4,565,154 - 3,600,000 3,600,000 2020 1,092,168 3,888,000 4,980,168 280,000 3,840,000 4,120,000 Total 5,157,460 18,360,000 23,517,460$ 280,000 20,160,000 20,440,000$

Tax Liability if SMLLC Tax Liability if C-Corp

Medical Device Analysis:Classification

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

IRC §4191Reg §48.4191-1 & 2

Medical Device Analysis:TuFFLabs Products

1. Diet Planner (not a medical device)• Will be sold at retail stores• No special skills to read device

2. Tricord- Scanner (medical device)• Sold primarily in doctors office• Needs doctor to read information

3. Knee Mobilizer (medical device)• Needs prescription from doctor, not easily accessible• Very expensive and not meant for the average consumers

Executive Compensation Analysis:

NQSO vs ISO

• 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

IRC §421IRC §422CCH. Employee Benefit Analysis ¶106,034

Executive Compensation Analysis:NQSO vs ISO

IRC §421IRC §422CCH. Employee Benefit Analysis ¶106,034

Employee Employer

NQSO

• Normal Income when exercised

(FMV – Option Price)

• Future Appreciation treated as Capital Gain

• Can deduct the amount treated as ordinary income

(FMV - Option Price)

ISO

• Capital Gain(Sale Price – Exercise Price)

• Not Deductible (Unless Disqualifying Disposition)

Executive Compensation Analysis:Tax Comparison

IRC §421IRC §422CCH. Employee Benefit Analysis ¶106,034

IRC §421IRC §422CCH. Employee Benefit Analysis ¶106,034

Alternative 1 Alternative 2

NQSO

$50-$32=$18 *1000shares

$18,000

$80-$50=$30*1000shares

$30,000

$50-$32=$18*1000shares

$18,000

$60-$50=$10*1000shares

$10,000

ISO

$80 -$32=$48*1000shares

$48,000

$50-$32=$18*1000shares

$18,000

$60-$32=$28*1000shares

$28,000(Does not qualify as ISO)

Executive Compensation Analysis:Tax Comparison

Executive Compensation Analysis:

Buyout Arrangements

• 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

CCH Employee Benefits Analysis ¶111,130

Review• 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