Small Business Technology Transfer Program (STTR)

STTR is an important small business program that expands funding opportunities in the federal innovation research and development arena. Central to the program is expansion of the public/private sector partnership to include the joint venture opportunities for small business and the nation's premier nonprofit research institutions. STTR's most important role is to foster the innovation necessary to meet the nation's scientific and technological challenges in the 21st century.

Competitive Opportunity for Small Business:

STTR is a highly competitive program that reserves a specific percentage of federal R&D funding for award to small business and nonprofit research institution partners. Small business has long been where innovation and innovators thrive. But the risk and expense of conducting serious R&D efforts can be beyond the means of many small businesses.

Conversely, nonprofit research laboratories are instrumental in developing high-tech innovations. But frequently, innovation is confined to the theoretical, not the practical. STTR combines the strengths of both entities by introducing entrepreneurial skills to high-tech research efforts. The technologies and products are transferred from the laboratory to the marketplace. The small business profits from the commercialization, which, in turn, stimulates the U.S. economy.

STTR Qualifications:

Small businesses must meet certain eligibility criteria to participate in the STTR Program:

American-owned and independently operated

For-profit

Principal researcher need not be employed by small business

Company size limited to 500 employees

The nonprofit research institution must also meet certain eligibility criteria:

Located in the US

Nonprofit college or university

Domestic nonprofit research organization

Federally funded R&D center (FFRDC)

The STTR System:

Each year, five federal departments and agencies are required by STTR to reserve a portion of their R&D funds for award to small business/nonprofit research institution partnerships.

Department of Defense

Department of Energy

Department of Health and Human Services

National Aeronautics and Space Administration

National Science Foundation

These agencies designate R&D topics and accept proposals.

Three-Phase Program:

Following submission of proposals, agencies make STTR awards based on small business/nonprofit research institution qualification, degree of innovation, and future market potential. Small businesses that receive awards then begin a three-phase program.

Phase I is the startup phase. Awards of up to $100,000 for approximately one year fund the exploration of the scientific, technical, and commercial feasibility of an idea or technology.

Phase II awards of up to $750,000, for as long as two years, expand Phase I results. During this period, the R&D work is performed and the developer begins to consider commercial potential. Only Phase I award winners are considered for Phase II.

Phase III is the period during which Phase II innovation moves from the laboratory into the marketplace. No STTR funds support this phase. The small business must find funding in the private sector or other non-STTR federal agency funding.

ADFA Approves Funding for Angel Capital Network

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ADFA Article

Tax Treatment of Startup Expenses

Are you starting a new business?

If so, your “start-up” expenses generally can’t be currently deducted. You can, however, elect to deduct a limited amount of start-up costs for the tax year in which the active trade or business begins (up to $5,000 ($10,000 for a tax year beginning in 2010), reduced by the amount by which the start-up costs exceed $50,000 ($60,000 for a tax year beginning in 2010)), with the remainder amortizable ratably over a 180-month period beginning with the month in which the active trade or business begins. This election is only available for start-up expenses that relate to an active trade or business, and not to investments.

One way to avoid or minimize start-up expenses that are nondeductible or which must be amortized over a 180-month period is to buy an activity that has already been developed by another taxpayer to the point of being an active trade or business. Once an active business is acquired, amounts spent to expand it generally won’t be subject to the special rule barring the deduction of start-up expenses.

“Start-up” expenses subject to the special election include those incurred in: investigating the acquisition or creation of an active trade or business; creating an active trade or business; or carrying on an activity engaged in for profit before the activity becomes an active trade or business, in anticipation of the activity becoming an active trade or business.

The rule generally barring the current deduction of start-up expenses ceases to apply once the business becomes active, nor does the prohibition apply at any time to certain interest, taxes and research expenditures. Also, the rule generally barring the current deduction of start-up expenses doesn’t apply to the cost of expanding an already existing active trade or business.

Has your business reached the “active” stage?

The rule barring current deduction of start-up expenses only applies to expenses incurred before the activity becomes an active trade or business. Also, 180-month amortization begins with the month in which this happens and the election to amortize must be made with the return for the tax year in which the business reaches the active stage.

Generally speaking, if the activities of a taxpayer have advanced to the extent necessary to establish the nature of its business operations, the taxpayer will be considered to have begun an active business. For example, the acquisition of operating assets which are necessary to the type of an active business contemplated may constitute the beginning of an active business. On the other hand, the receipt of income, in and of itself, doesn’t necessarily mean that the active business stage has been reached. And even if all necessary business assets are on hand, IRS and some courts may require something more under certain circumstances before an activity is deemed to be an active business, for example, the commencement of marketing activities or the actual operation of business assets.

The time at which an activity becomes an active business is an important determination because a miscalculation on this point can cause the loss of important tax benefits. For instance, the election to deduct/amortize start-up expenditures must be made not later than the due date of the taxpayer’s return (including extensions) for the tax year in which the active business begins. If a taxpayer has any doubt as to when the active business began, an election should be made in the year the expenditures are paid or incurred, or at least in the first year there is any reason to believe IRS might take the position that business began. Otherwise, the right to make the election would be lost if IRS successfully claimed that the business actually began in an earlier year.

Do you expect to pay interest, taxes or research expenses in starting a new business?

Otherwise deductible interest, taxes and research expenses aren’t subject to the rule that generally bars the current deduction of start-up expenses.

Do you plan to expand an already existing active business?

Ordinary and necessary business expenses incurred in expanding an already existing active trade or business (whether purchased or created by the taxpayer) aren’t subject to the special limits on start-up expenses and are generally deductible.

Whether a taxpayer is expanding an old business or starting a new one can be a tricky determination in certain cases, especially where there is a change in the kind of business done as well as in the size of the old business.

If in doubt, consider treating the outlays in question as start-up expenses while making the amortization election. In the event that it’s later determined that you were in fact expanding an old business (and not creating a new one), it’s possible that you will still be able to deduct the expenses by filing an amended return. On the other hand, if the election isn’t made and the outlays are later determined to be start-up expenses, you will be stuck with expenditures that have to be capitalized and can’t be amortized.

If the intention is to expand an old business through a new and different entity (for example, through a newly organized partnership or corporate subsidiary), the expenses generally can’t be currently deducted.

Do you plan to expand an old business through a new entity?

If so, the special exception for expenses incurred to expand an old business may not apply. This is because the trade or business activities of one tax entity can’t be attributed to another for this purpose. For instance, if a partnership incurs expense to create additional branches or units for its already existing business to be carried on by separate tax entities, for example by newly organized corporations to be owned by the partnership, the expenses won’t qualify under the exception. One solution to this problem would be to have the partnership or other original entity first transfer part of its old business to the new corporation, then have the new corporation expand it. Or buy an old corporation that’s already in the same line of business and then have the old corporation expand that business. In either case, the corporation would be able to deduct the expansion outlays.

In the case of a corporate parent-subsidiary situation, a special rule may allow the deduction of expansion expenses incurred before the sub comes into existence if (1) the parent and the sub are in the same business, (2) the customers of the sub have the right to obtain goods or services from the parent if the sub can’t provide them, and (3) gross receipts from the expansion are reported as income on the affiliated group’s consolidated return. This might apply, for example, to a chain of health clubs.

Does the contemplated business require a license or franchise or other outlay that ordinarily must be capitalized?

The deduction/amortization election only applies to outlays that would be currently deductible if it weren’t for the start-up expense limitation. As a result, items that ordinarily have to be capitalized, such as the cost of acquiring a license or a franchise, don’t qualify for the election. However, the cost of a license or franchise may be amortizable.

Do you expect to incur syndication or organizational expenses?

Starting a new business may involve partnership or corporation organization expenditures. You can elect to deduct a limited amount of these expenditures (up to $5,000, reduced by the amount by which the organizational expenses exceed $50,000), with the remainder amortizable over a 180-month period beginning with the month in which the active trade or business begins. If the election isn’t made, no deduction would generally be allowed until the organization goes out of existence. Also, the deduction/amortization election doesn’t apply to partnership syndication expenses, which must always be capitalized.

Have you tried to start a new business, then given up on the project?

The deduction/amortization election doesn’t apply to unsuccessful search, investigatory, or pre-opening expenditures for a new business or a for-profit investment transaction. In the case of a corporation, these fruitless start-up costs can be deducted as a loss when the project is abandoned. But the unsuccessful start-up expenses of noncorporate taxpayers not engaged in a trade or business when the start-up costs are paid or incurred are, with one exception discussed below, treated as nondeductible, personal expenses.

Where a noncorporate taxpayer has gone beyond a general search for a new business to focus on a specific enterprise, the unsuccessful start-up expenses are deductible as a loss.

Noncorporate taxpayers contemplating substantial expenditures in investigating a new business should consider organizing a small business corporation to undertake the search and, if successful, to conduct the new business. If the search or investigation proves fruitless, the stockholders are entitled to an ordinary loss deduction on their small business corporation stock.

Do you plan to use depreciable assets in starting a new business?

Ordinarily, depreciation deductions are not available until the asset is placed in service in the taxpayer’s trade or business. However, elective deduction/amortization is available for amounts that would be deductible if paid or incurred in an existing business. Thus, the cost, for example, of a computer or word processor used to train new employees or to set up an accounting system, to the extent depreciable during the start-up period, should qualify for the deduction/amortization election.

Rights & Preferences, What to Expect from a VC

Your company has grown to the point that you are no longer in need of “friends and family money” or angel financing.  You are now seeking venture capital funding that will help move your company further down the growth spectrum; but, you are not sure what to expect in terms of the rights and preferences that a venture capitalist may require for its investment in your company.  This article will briefly highlight some of the more common rights and preferences that a venture capitalist will expect for an investment in your company and that you will see outlined when you are presented a term sheet by the venture capitalist.

Antidilution Rights

Antidilution rights protect the venture capitalist against the issuance of securities by your company at a later date for a price less than what was paid by the venture capitalist.  If the venture capitalist purchased preferred stock in your company and is afforded antidilution protection, the term sheet will generally specify a formula for adjusting the conversion ratio to take into consideration any fluctuation in the share price upon the issuance of new securities.

Conversion Rights

If the venture capitalist is purchasing preferred stock, generally there will be conversion rights attached to those shares.  Conversion rights can either be mandatory or optional.  If the preferred stock is subject to mandatory conversion rights, the term sheet will specify what those events are and will provide a formula for the conversion of the preferred shares into common shares.

Drag Along, Tag Along, First Refusal, Co-Sale and Preemptive Rights

Generally, a venture capitalist will require the shares of stock it purchases to have any one or all of the following rights: the right of the venture capitalist to compel minority shareholders to participate in a stock sale (drag along); the right of a minority shareholder venture capitalist to sell its shares with the majority shareholders (tag along); the right of the venture capitalist to be first offered securities to be sold by other shareholders or your company (first refusal);  the right of the venture capitalist to sell its securities along with any securities sold by other shareholders or your company (co-sale); and the right of the venture capitalist to acquire any newly issues securities issued by your company to the extent required to maintain the relative percentage ownership on an as-converted basis (preemptive).

Registration Rights

Registration rights entitle the venture capitalist to force your company to register shares of common stock issuable upon conversion of preferred stock with the Securities and Exchange Commission.

Voting Rights

Most commonly, the venture capitalist receives the number of votes equal to the number of shares of common stock into which its securities may convert upon a conversion trigger event.  The term sheet will generally describe whether the preferred stock purchased by the venture capitalist has “class” or “protective” voting rights or whether the venture capitalist has special rights to take control of your company upon the occurrence of certain events of default. The venture capitalist will often have the right to elect (or otherwise appoint for election by the company’s shareholders) one or more members of the board of directors of your company.

Information Rights

If the venture capitalist is a minority shareholder, the venture capitalist will typically desire the right, which should be specified in the term sheet, to receive monthly and/or quarterly financial statements, an annual audited financial statement, and an annual budget, as well as the ability to have interim access to the books and records of your company.

Dividend Preference

Many times a venture capitalist will be entitled to special dividends or other preferential returns on the securities it purchases.  The term sheet will also set forth whether such dividends will accumulate to the extent not paid and whether the holders of common stock or any other junior securities may receive dividends or other distributions if accumulated dividends owing to the venture capitalist are not paid.

Liquidation Preference

For the risks associated with investing in an early stage company, venture capitalists may require a premium on the investment.  Liquidation preference refers to the right of a venture capitalist to receive a return prior and in preference to other shareholders on liquidation or sale of your company.

These are just a few of the common rights and preferences that you can expect to see contained in the initial term sheet you receive from a venture capitalist.  The term sheet is designed to highlight the most important business terms of the equity sale and will almost always provide that the definitive agreements will contain such other customary terms and conditions as may be appropriate.  It is important for you to understand what every each provision of the term sheet means to your company and its capital structure.  Seek out counsel and advice early in the process so that you can be better prepared during the negotiation of the terms and conditions of the venture capitalists investment into your company.

Tax Law Changes in PPACA

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Energy Department Announces $102 Million for Small Business Research

The Energy Department announced on June 27 that it will award new funding to 104 small businesses nationwide. The grants, totaling more than $102 million, will support businesses in 26 states, helping companies to develop promising technologies with a strong potential for commercialization and job creation.

Funded through the Energy Department's Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, the selections are for Phase II work. In Phase II, companies will build on the conceptual work undertaken in Phase I and pursue the next steps in bringing the technologies to market. The Phase II awards are up to $1 million for work over two years. The awards support developing technologies in areas ranging from large wind turbine towers to more energy-efficient data centers. For example, the Xunlight 26 Solar company of Toledo, Ohio, will work on transparent, flexible cadmium telluride modules for photovoltaics.

California, New Jobs Credit Update

The Franchise Tax Board (FTB) has announced that as of June 30, 2012, $121,123,174 ($117,441,362 as of June 3, 2012) in total New Jobs Credit was generated on personal income tax and business entity tax returns filed/processed. California has allocated $400 million for this tax credit. Taxpayers may only claim the credit on an original timely filed return received by the FTB on or before a cut-off date specified by the FTB. The cut-off date is the last day of the calendar quarter within which the FTB estimates it will have received timely filed original returns claiming the credit that cumulatively total $400 million. A new jobs credit of up to $3,000 per additional full-time employee hired is allowed to qualified small businesses with 20 or less employees.