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NOTE: This material was updated on Feb. 12 to correct an error in the information about the Philadelphia Net Income Tax.

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For those of you that saw my post on why MODsolar is moving into Center City and wanted details about the tax side, here's some more details:

  • City Wage Tax - no getting around that.  ~3.75% of gross wages, paid by the employee (NOTE: we knew this would be an issue for our folks - so we grossed-up the salaries of anyone living outside the city at the time of the move - to account for city wage tax and make the move take-home neutral for them)
  • U&O tax - use and occupancy - generally calculated by your landlord and added to your rent (or you remit separately), but a portion of what you pay in rent every year - generally about 10%.  Given the low-cost of space in the city,  not really an issue
  • BIRT - Gross - so this was where the fear came from - a tax on gross revenue - but it was so low - 1.45 mils - that it became a non-issue (figure $14,500 per $1mm in revenue)
  • BIRT - Net - this was where we thought we could be in real trouble.  If you're a fast-growing start-up whose VC's want you burning cash to grow - you don't have to worry about this one until you're heavily in the money.  But, if you're growing-but-not-on-fire business, this is a concern.  It's 6.45% of your Net Profit - yes, you read that right!  But it's on your taxable net income.

And here's where I think Philly gets tech start-up friendly in a hurry.  This tax is on your "taxable" income. Ok, so it turns out that prior to 2015, there were 4 criteria for what qualifies for taxable net income in the city.  in 2015, they reduced that to one - the only one that we cared about -  where your income is earned.

As of tax year 2015, your Philadelphia Net Income Tax liability is a percentage of the taxable net income you generate. It is based on the percentage of your sales that occur in Philadelphia. That percentage, multiplied by 6.45%, is your tax rate. So if 100% of your sales are in Philadelphia, the tax is 6.45% of net income. But if only 10% of your sales are in Philadelphia, the tax rate is 0.645% (10% x 6.45%).

Since less than 10% of MODsolar's sales are in Philadelphia, our tax liability will be a fraction of one percent of our net income. (That's not zero--as we erroneously implied in an earlier version of this blog post--but it's still a good deal for us, we think.)

Now here's the kicker - there's also a credit right now for new job creation within the city.  $5,000 for each job you create - and you can carry it forward.  We're moving 20 jobs into the city, and plan to hire another 10-20 folks by the end of this year.  So by the end of the year, we could have tax credits worth $200,000 to apply to any BIRT we would otherwise have to pay - and you can carry it forward (for 5 years I think - but check on that)!  MODsolar will effectively not be paying any BIRT for several years! Cha-ching! And there's one last piece - don't forget that if you offer transit benefits to your folks, there are pre-tax savings for your employees, and a payroll tax incentive for the employer (we're still looking into this one).

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