The federal income taxation of patents and other intellectual property is an area that requires planning to determine the right tax treatment for your particular situation. In this article I will address legal fees and costs related to obtaining a patent.
Attorneys’ fees expended in conjunction with making and perfecting a patent application are considered “research or experimental expenditures” under section 174 of the Internal Revenue Code. Under the tax code, taxpayers have two options regarding research expenses: 1) deduct their research expenses in the year incurred, or 2) capitalize the expenditures and amortize them over a period not less than 5 years. In other words, the taxpayer can choose how they want to treat their research and experimental costs depending on their situation.
Note that this decision must be made on the first tax return in which the taxpayer incurs research expenses. Once the choice has been made, the taxpayer must continue with the same treatment unless they get IRS approval to change. For example, if you treat your research and development costs as capital expenses in the first year, you must continue to use that method unless you get IRS approval to change.
It should also be noted that if you have legal fees related to obtaining a patent, you may be eligible for the R&D tax credit. As mentioned in my last article, even if your business is not currently profitable you can still benefit from the credit.
If you have questions about the tax ramifications of patent expenses, please contact me at 612-376-1268.