8139 / What are the most critical tax issues involving companies that own, acquire, sell, and/or create intellectual property?

In many instances, a company’s most valuable asset is its portfolio of intellectual property. Intellectual property assets include patents, trademarks, trade secrets, formulas, domain names, software, etc. Many tax and business issues must be analyzed to determine who should own the intellectual property (holding company, etc.) and where (what country or state). The tax issues involving intellectual property are extremely complex. While many issues impact the taxation of intellectual property, five of the primary tax issues that a tax advisor must be familiar with when dealing with intellectual property are:

1.  The most tax effective way to utilize the costs incurred in developing or creating the intellectual property. While a current deduction may be most advantageous, in many instances that option is not available. The IRC Sections that may apply include Sections 162, 174, 263, and 263A. Note that certain sections, as well as state laws, may impact the deductibility of certain costs paid to a related party.

2.  Existing tax credits for the research and development expenses incurred by the business. The Internal Revenue Code Sections that may apply in this area include Sections 38 and 41, as well as state-level credits.

3.  How to treat the costs incurred when acquiring or selling intellectual property. The primary Internal Revenue Code Sections to consider in making this determination include Sections 167, 197, 263, 267, 1001, 1231, 1235, 1239, as well as other common sections applicable to the sale or exchange of an asset.

4.  The character of income received from a licensing arrangement.

5.  The character of income received from the outright sale of intellectual property.