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Tax Issues Regarding Copyrights, Patents and Trademarks
Published on Mar 15, 2012
Read 'Tax Issues Regarding Copyrights, Patents and Trademarks' at 'Time to Start Up,' the small business blog by BizFilings.
By Eva Rosenberg, EA
You’ve heard the old adages, “The shoemaker’s children go barefoot.” Or “Do as I say, not as I do.” It’s important to learn from these sayings. They apply to many of us. How?
We are all eager to do work for our clients, customers, family and friends. But when it comes to some of the key issues relating to our own businesses, well…administration falls by the wayside, doesn’t it.
Yes, it even happened to me. When I first started the TaxMama.com website with Ask TaxMama issue #1 in January of 1999, I didn’t rush out and trademark “TaxMama”. Nope, I didn’t file for my trademark until October 2005. At that point, I had to fight for the trademark – and it cost me 3 years, and a bit of money. But,right now, TaxMama is officially trademarked and owned by me, Eva Rosenberg.
Unlike copyrights, which automatically belong to you for all your creations, whether you file anything or not, you must file your patents and trademarks with the U.S. Patent and Trademark office – and perhaps fight your case. Of course, it doesn’t hurt to protect your copyrights, as well. After all, if you don’t establish that you are the one who originated a word, article, story, song, film, etc., how will you prove that you are the copyright-holder?
Karen Kobelski talked more about protecting your intellectual property at the BizFilings Facebook Roundtable on March 14, 2012.
Intellectual Property rights
How do you handle the tax issues related to Copyrights, Patents and Trademarks – which we will simply call Intellectual Property rights, or IP for short?
Let’s look at the simplest level of IP costs. When you can establish your rights for a couple of hundred dollars and be done with it, just write off the costs in the year you spend the fees. Call them legal fees. Anything under $500 is just too small to carry on the depreciation schedule, year-after-year.
However, once you start getting into the hundreds and thousands of dollars, it’s time to look at the U.S. Tax Code. The IRS treats IP costs as Internal Revenue Code Section 197 intangibles. The costs are amortized over 15 years. There is very little leeway on this. But there is some.
We are permitted to write off up to $5,000 of the first year’s start-up costs, instead of treating them as capital assets. Of course, the business must have opened its doors in order to get this special benefit. If you use this start-up cost write-off, you can include your IP costs as part of the $5,000.
Not Quite Ready for Prime Time
What about companies the expend thousands of dollars on IP, but don’t really start generating revenues for years. After all, some of the most important products on the market (pharmaceuticals, vehicles, etc.) may take years to research, develop and patent. How do they handle the costs of their intellectual property?
Generally, they will just accumulate the costs until the product is ready to go to market. Along the way, they can pick up tax benefits, such as research and development tax credits, amortize research and development costs (not trademark or patent costs) over 60 months (5 years), and perhaps even pick up a Code Section 199 domestic production credit. This is a particularly complicated credit to use – but it applies to a lot of industries, including home-based Internet businesses.
One thing that’s important to note about tax credits. When you use them, you must also reduce your total costs by the amount of the credit before you start depreciating or amortizing your costs.
Zoning Out Now!
Your eyes are starting to glaze over. So are mine. Yes, we are starting to head into gobble-de-gook territory. The words are starting to muddle and puddle. So, it’s a good time to seek out the services of a good tax professional to work with you. When dealing with intellectual property, find someone who is an expert in this area of taxation.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered for free. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches tax courses at IRSExams.com and CPELINK. Join us on March 14th - A Tax Checklist for Small Businesses
Do you have a passion for taxes? TaxMama is conducting a search for the Ultimate Tax Nerd of 2012.Enter to win prizes, including a Kindle Fire, tax software and other swag.
 Amortizing – it’s just depreciation, where you spread the cost over several years. You depreciate physical, tangible assets – things you can touch. You amortize intangibles – things you cannot touch – like points, trademarks, ideas, etc.