Patents are all about money - spending money to acquire patents, spending more money to get even more money either as royalties or market share. At each and every step, don't forget the IRS, either in taking deductions for your expenses, or paying taxes on your profits. Your local city library will have a complete copy of the Internal Revenue Code, the United States Code Annotated (including the IRS code with references to court decisions), and the Corpus Joris Secundum (similar to the USCA). In general, the tax aspects of patenting and trademarks and copyrights is straightforward. The law firm of Alston & Bird has an update on Intellectual Property Tax Planning, circa November 1999.
(a) Treatment as expenses
(1) In general - A taxpayer may treat research and experimental expenditures
which are paid or incurred by her during the taxable year in connection with
her trade or business as expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as a deduction.
[Note: IRS Reg. 1.174-2(a)(2) allows attorney fees incurred in making and
perfecting a
patent
application may be deducted under special provisions
allowing a taxpayer to treat research and development costs as deductions,
rather than capital expenditures.]
(2) When method may be adopted - (A) Without consent - A taxpayer may,
without the consent of the Secretary, adopt the method provided in this
subsection for his first taxable year - (ii) for which expenditures
described in paragraph (1) are paid or incurred.
(3) Scope - The method adopted under this subsection shall apply to all
expenditures described in paragraph (1). The method adopted shall be
adhered to in computing taxable years unless, with the approval of the
Secretary, a change to a different method is authorized with respect to
part or all of such expenditures.
(e) Only reasonable research expenditures eligible - This section
shall apply to a research or experimental expenditure only to the extent
that the amount thereof is reasonable under the circumstances.
(a) Allowance of deduction - If a compensatory amount which is
included in gross income is received or accrued during the taxable year
for a compensable injury, there shall be allowed as a deduction for the
taxable year an amount equal to the lesser of (1) the amount of such
compsenatory amount, or (2) the amount of the unrecovered losses
sustained as a result of such compensable injury.
(b) Compsenable injury - For purposes of this section, the term
"compensable injury" means - (1) injuries sustained as a result of an
infringement of a
patent
issued by the United States, (2) injuries
sustained as a result of a breach of contract of fiduciary duty or
relationship, or (3) injuries sustained in business, or to property,
by reason of any conduct forbidden in the antitrust laws for which a
civil action may be brought under section 4 of the Act entitled "An Act
to supplement existing laws against unlawful restraints and monopolies,
and for other purposes", approved 15 October 1914 (commonly known as the
Clayton Act).
(c) Compensatory amount - For purposes of this section, the term
"compensatory amount" means the amount received or accrued during the
taxable year as damages as a result of an award in, or in settlement of,
a civil action for recovery for a compensable injury, reduced by any amounts
paid or incurred in the taxable year in securing such award or settlement.
(a) General rule - A taxpayer shall be entitled to an amortization
deduction with respect to any amortizable section 197 intangible. The
amount of such deduction shall be determined by amortizing the adjusted
basis (for purposes of determining gain) of such intangible ratably over
the 15-year period beginning with the month in which such intangible was
acquired.
(b) No other depreciation or amortization deduction allowable -
Except as provided in subsection (a), no depreciation or amortization
deduction shall be allowable with respect to any amortizable section
197 intangible.
(d) Section 197 intangible - For purposes provided in this section,
the term "section 197 intangible" means (A) goodwill, (B) going concern
value, (C) any of the following intangible items: (iii) any
patent, copyright, formula, process, design,
pattern, knowhow, format or other similar item, (D) any license, permit or
other right granted by a governmental unit or an agency or instrumentality
thereof, (F) any franchise, trademark or trade name
.
(a) Amount constituting interest - For purposes of this title, in
the case of any payment - (1) under any contract for the sale or exchange
of any property, and (2) to which this section applies, there shall be
treated as interest that portion of the total unstated interest under such
contract which, as determined in a manner consistent with the method of
computing interest under section 1272(a), is properly allocable to such
payment.
(d) Exceptions and limitations - (4) Certain sales of patents - In
the case of any transfer described in section 1235(a) relating to sale or
exchange of patents), this section shall not
apply to any amount contingent on the productivity, use, or disposition
of the property transferred.
(a) Gross income from sources within United States - The following
items of gross income shall be treated as income from sources within the
United States: (1) Interest, ... (2) Dividends, ... (3) Personal services,
... (4) Rentals and royalties - Rentals or royalties from property located
in the United States or from any interest in such property, including
rentals or royalties for the use of or for the privilege of using in the
United States patents, copyrights, trademarks,
secret processes and formulas, good will, trade brands, franchises, and
other like property.
(b) Taxable income from sources within United States - From the items
of gross income specified in subsection (a) as being income from sources
within the United States there shall be deducted the expenses, losses and
other deductions property apportioned or allocated thereto and a ratable
part of any expenses, losses or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any,
shall be included in full as taxable income from sources within the United
States. In the case of an individual who does not itemize deductions, an
amount equal to the standard deduction shall be considered a deduction
which cannot definitely by allocated to some item or class of gross income.
(a) Gross income from sources without United States - The following
items of gross income shall be treated as income from sources without the
United States: (1) Interest, ... (2) Dividends, ... (3) Personal services,
... (4) Rentals or royalties from property located
without the United States or from any interest in such property, including
rentals or royalties for the use of or for the privilege of using without the
United States patents, copyrights, trademarks,
secret processes and formulas, good will, trade brands, franchises, and
other like properties;
(b) Taxable income from sources without United States - From the items
of gross income specified in subsection (a) there shall be deducted the
expenses, losses and other deductions property apportioned or allocated
thereto and a ratable part of any expenses, losses or other deductions which
cannot definitely be allocated to some item or class of gross income. The
remainder, if any, shall be included in full as taxable income from sources
without the United States. In the case of an individual who does not itemize
deductions, an amount equal to the standard deduction shall be considered a
deduction which cannot definitely by allocated to some item or class of
gross income.
(a) Qualified export receipts - (1) General rule - For purposes of
this part, except as provided by regulations under paragraph (2), the
qualified export receipts of a corporation are - (A) gross receipts ......
(E) dividends ...... (F) interest ......
(c) Export property - (2) Excluded property - For purposes of this
part, the term "export property" does not include - (B)
patents, inventions, models, designs, formulas,
or processes, whether or not patented,
copyrights (other than films, tapes,
records, or similar reproductions, for commercial or home use), good will,
trademarks, trade brands, franchises, or other
like property.
(a) General - A transfer (other than by gift, inheritance, or devise)
of property consisting of all substantial rights to a
patent, or an
undivided interest therein which includes a part of all such rights, by any
holder shall be considered the sale of exchange of a capital asset held for
more than 1 year, regardless of whether or not payments in consideration of
such transfer are - (1) payable periodically over a period generally
coterminous with the transferee's use of the patent, or (2) contingent on
the productivity, use or disposition of the property transferred.
(b) "Holder" defined - For purposes of this section, the term "holder"
means - (1) any individual whose efforts created such property, or (2) any
other individual who has acquired his interest in such property in exchange
for consideration in money or money's worth paid to such creator prior to
actual reduction to practice of the invention covered by the patent, if
such individual is neither - (A) the employer of such creator, nor (B)
related to such creator (within the meaning of subsection (d)).
(c) Effective date - This section shall be applicable with regard
to any amounts received, or payments made, pursuant to a transfer described
in subsection (a) in any taxable year to which this subtitle applies,
regardless of the taxable year in which such transfer occurred.
(a) Treatment of gain as ordinary income - In the case of a sale or
exchange of property, directly or indirectly, between related persons, any
gain recognized to the transferor, shall be treated as ordinary income if
such property is, in the hands of the transferee, of a character which is
subject to the allowance for depreciation provided in section 167.
(e) Patent applications treated as depreciable property - For
purposes of this section, a patent application
shall be treated as property which, in the hands of the transferee, is of a
character which is subject to the allowance for depreciation provided in
section 167.
(a) General rule - A transfer of a franchise,
trademark or trade name shall not be treated
as a sale or exchange of a capital asset if the transferor retains any
significant power, right or continuing interest with respect to the subject
matter of the franchise, trademark or trade name.
(c) Treatment of contingent payments by transferor - Amounts
received or accrued on account of a transfer, sale or other disposition
of a franchise, trademark, or trade name which are contingent on the
productivity, use or disposition of the franchise, trademark or trade
name transferred shall be treated as amounts received or accrued from the
sale or other dispostion of property which is not a capital asset.
(d) Treatment of payments by transferee
-
(1) Contingent serial payments - (A) Any amount described in
subparagraph (B) which is paid or incurred during the taxable year on
account of a transfer, sale, or other disposition of a franchise,
trademark, or trade name shall be allowed as a deduction under
section 162(a) (relating to trade or business expenses). (B) Amounts to
which paragraph applies - An amount is described in this subparagraph if
it - (i) is contingent on the productivity, use, or disposition of the
franchise, trademark, or trade name, and (ii) is paid as part of a series
of payments - (I) which are payable not less frequently than annually
throughout the entire term of the transfer agreement, and (II) which are
substantially equal in amount (or payable under a fixed formula).
(2) Other payments - Any amount paid or incurred on account of a
transfer, sale, or other disposition of a franchise, trademark, or trade
name to which paragraph (1) does not apply shall be treated as an amount
chargeable to capital account.
(3) Renewals, etc. - For purposes of determining the term of a
transfer agreement under this section, there shall be taken into account
all renewal options (and any other period for which the parties
reasonably expect the agreement to be renewed).
Nontaxable Exchanges - Certain exchanges of property for the same
kind of property is the most common type of non-taxable exchange. To be
a like-kind exchange, the property traded and the property received must
be both: 1) qualifying property, and 2) like property.
Intangible personal property and non-depreciable personal property
If you exchange intangible personal property or nondepreciable personal
property for like-kind property, no gain or loss is recognized on the
exchange. Whether intangible personal property, such as a
patent or copyright, is of a like kind to
other intangible personal property generally depends on the nature or
character of rights involved. It also depends on the nature or character
of the underlying property to which those rights relate. Example: The
exchange of a copyright on a novel for a copyright on a different novel
can qualify as a like-kind exchange. However, the exchange of a copyright
on a novel for a copyright on a song is not a like-kind exchange.
Section 197 Intangibles - Section 197
intangibles are certain intangibles acquired after August 10, 1993, and
held in connection with the conduct of a trade or business or an activity
entered into for profit, whose costs are amortized over 15 years. They
include: .... 5) patents, copyrights, formulas, ..... 10) tradenames.