Patents May Be Intangible Property Under Publication 535.

The tax treatment of patents arise when buying or selling a business with patent assets, or licensing patents because certain assets are intangible and must be amortized:

Section 197 Intangibles Defined: The following assets are section 197 intangibles and must be amortized over 180 months:

  1. Goodwill;
  2. Going concern value;
  3. Workforce in place;
  4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers;
  5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item;
  6. A customer-based intangible;
  7. A supplier-based intangible;
  8. Any item similar to items (3) through (7);
  9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals);
  10. A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business;
  11. Any franchise, trademark, or trade name; and
  12. A contract for the use of, or a term interest in, any item in this list.

Tax Treatment: Some Patent Expenses May Be Capitalized and Amortized.

Section 1235 of the IRS Code provides for capital gain treatment of a patent.  The key criteria to qualify for capital gains treatment is to be a “holder”.

Generally a holder may be the inventor or one who bought from the inventor or one who obtains an interest in the technology before it is reduced to practice.  For example, investment partners and investment co-owners who contribute capital can qualify as holders so long as the contribution is made before reduction to practice.

A patent can have its rights divided by separate licenses, e.g. by geography, type of product, time duration, and the like.  An agreement for the sale of a patent, which is not intended to be a license, must involve the sale of substantially all of the rights in the patent, otherwise, the monies received will be treated as ordinary income.

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