| What are the tax consequences of a
patent?
Research and development expenditures are tax deductible to the extent
they are incurred in connection with a trade or business. In some
instances, fees incurred in developing and patenting ideas may be
deductible. These expenses are generally required to be deducted in the
first year in which they are paid or incurred. However, in certain
instances, they may be treated as deferred expenses to be amortized over
a period of not less than sixty (60) months.
The requirement that these expenses be incurred in connection with a
trade or business poses issues for individual inventors that have a
trade or business (i.e., career) not related to their inventions. One
method of dealing with this issue is to establish a separate business
entity to conduct the research and development of the inventor’s idea.
Through the use of a “flow through” entity, the inventor can clearly
establish a trade or business separate from their chosen career. A “flow
through” entity is an entity in which the tax consequences of the
business “flow through” to the owner(s) of the business. “Flow through”
entities do not pay taxes on their income but instead pass the income,
deductions, and other tax items on to the owners, who then pick these
items up on their personal returns.
With careful planning and proper structuring of the business entity, the
inventor is able to deduct research and development costs and is able to
maximize his/her return on the investment in his/her invention. For more
information on structuring corporate entities to deduct research and
development expenditures, contact Tax Attorney James McElligott at (757)
288–7536.
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