Today TaxMama hears from Douglas in the TaxQuips Forum with this question. “How does one deduct the attorney fees related to obtaining a patent? The patent is for a video game. The taxpayer is not in the business of creating video games. The plan is to sell the patent to a video game company once the patent is approved.”
Well, you don’t get to deduct business expenses unless you’re in business, right? Besides, when it comes to patent and copyright costs, typically you capitalize those (treat them as assets, not expenses). Though, if you have an active business, you can write them off over 15 years (sec 197 intangibles). However, if there is no active business, you can’t amortize the costs.
So, what do you do with the costs? Hold on to them. The costs to patent the game will the basis (tax cost) for the patent. They will reduce the profits when the game is sold to the video game company.
Then, you may have two kinds of income. An initial purchase price – which you would report on Schedule D as capital gain. And the annual fees for the use of the patent, which would be royalties, reported on Schedule E, page 1.
Hopefully, you have the good sense not to sell the patent outright – but to collect royalties as long as they are selling the game. And consider separating the US rights from the international rights. If the company doesn’t get around to selling the game outside the US, you don’t want to be locked in with them and prohibited from selling the rights to an overseas company.
Good luck! I hope this turns into a vastly popular game!
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