Taxes

U.S. tax code is more favorable to those involved in the development and securing of a patent than in those who later acquire an issued patent. Reasonable costs of research and development of patentable subject matter are fully deductible , and the costs of patent attorneys and agents are also deductible to the extent that they were involved in filing and perfecting (i.e. prosecuting) a patent application .Of course one can only expense those costs if they were incurred in connection with the taxpayer's trade or business. In contrast, the costs of purchasing of patent rights are amortizable over a 15 year period . The amount of the deduction is determined by amortizing the adjusted basis over the 15-year period beginning with the month in which such intangible was acquired. Patents do not count as qualified export assets under section 993 .

Licensing income from rentals or royalties relating to patents is treated as ordinary income . This applies to both income from within the United States and income from without . There are strategies for avoiding that outcome, but they must be set up in advance. See Chapter XIV, section I(1), infra.

Transfers of patents are taxable as capital gains, so long as the holder is transferring all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights. The favorable rate applies 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. 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)) .

For those considering more sophisticated tax issues, it should be noted that: section 483, dealing with present value of deferred payments does not apply to sales of patents ; gain from sale of a patent between certain related taxpayers is subject to the allowance for depreciation provided in section 167 ; and exchanges of patents may be considered same-kind transfers . Note that the era in which patent holders could receive excessively high tax deductions by donating their patents to charities has now been closed . See Chapter XII, section H, infra. Currently, the patents must be donated at "fair value".

While assignments of U.S. patent applications from an employee scientist or engineer to the company typically have no tax consequences, assignment of foreign patent applications and patents can be a very different story because of such transfers can be subject to value added tax. See Chapter XIV, section I(6), infra. Foreign taxes are also a consideration. Many companies assign their intellectual property to an off-shore company, division, or subsidiary as a means of shunting profits out of the country. In such circumstances it may be wise to make the assignment or license early on, before the intellectual property has significant value. Otherwise the consideration may be viewed as inadequate, and the transaction viewed as a sham. One should also be cognizant that many countries having value-added taxes place a tax on transfer of intellectual property. In the case of extremely valuable patents, such a transfer (even to a related company) can unwittingly incur very significant taxes.

Patent infringement payments or obligations incurred are deductible, but only the lesser of: (1) the amount of such compensatory amount, or (2) the amount of the un-recovered losses sustained as a result of such compensable injury . 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.