Tax Basics of Intellectual Property

Like most assets developed, used, and sold in business, intellectual property (IP) is subject to important tax considerations. For purposes of U.S. federal tax law, intellectual property is part of a broader category of assets called “intangible assets.” Intellectual property specifically addressed in the Internal Revenue Code (I.R.C.) includes patents, copyrights, formulas, processes, designs, patterns, know-how, format, trade secrets, trademarks, trade names, franchises, and computer software.¹ This article presents a brief overview of the basic U.S. federal tax considerations of events that may occur over the life cycle of intellectual property, from its creation to its acquisition, exploitation, licensing, and transfer. It begins by discussing important general tax concepts such as tax basis, capitalization, amortization, and asset characterization, in the context of intellectual property. Certain new rules introduced by the Tax Cuts and Jobs Act of 2017 (TCJA)² are also addressed, including a new tax regime applicable to offshore intellectual property.