Intellectual Property: Rethinking Your Tax Strategy

January 11, 2019

Along with many other changes to the corporate tax structure, the Tax Cuts and Jobs Act (TCJA) of 2017 also impacted the treatment of income generated by intellectual property. If your business generates income from its intangible assets, such as licenses and patents, it may be time to rethink your tax strategy. On the one hand, the IP generated income is now subject to a 13.125% tax rate for the next six years (increasing to 16.4% after), significantly lower than the 35% of old. On the other hand, the income generated by the sale of certain types of IP, specifically those related to technology and pharmaceuticals, will no longer be subject to capital gains tax, but rather treated as ordinary income.

The changes came as a response to multinational corporations’ attempts to avoid the United States’ high corporate tax rates by holding their intangible IP assets overseas through foreign-domiciled subsidiaries based in low-tax countries, such as Ireland. The royalties earned by the use of the IP was then subject to the tax rates of the host country, rather than the U.S. By lowering the tax rate of IP generated income, the U.S. hopes to repatriate the tax income from IP. Additionally, the lower tax rate could attract foreign companies to move their royalty-producing assets to the U.S. Overall, companies involved in the technology, healthcare, or engineering fields that derive foreign IP income should consult with their attorneys to determine the best tax-saving strategy. Contact the attorneys at Rock Fusco & Connelly to learn more.

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