Intellectual Property is Now an Ordinary Income Asset, Doubling its Tax Cost at Sale

Intellectual property has historically been treated as a capital gain asset. However, new Code §1221(a)(3), in the Tax Cuts and Jobs Act treats patents, inventions, certain models or designs and secret formulas or processes as ordinary income assets. They are no longer treated as a capital asset benefitting from capital gain treatment in the sale of a business or sale and leaseback situation.

“With this change, the capacity to sell your business and not be clear about your tax cost dramatically increases,” said James Smyth, Executive Director of Custom Structured Settlements, LLC.

Added Arthur Jensen, Senior Tax Director of Custom Structured Settlements, LLC, “It’s going to be 37 percent compared to a 20 percent capital gain tax rate, which almost doubles the federal tax costs on a sale of some businesses in addition to the state tax. So a person works his entire life building a business, paying ordinary income taxes all along and then it’s time to sell and retire in peace and well-earned comfort. Now, beginning January 1, 2018, the IRS can challenge the business value allocations for three years after tax returns are filed for the sale. It often takes a year to sell, a year to file the tax return, and three years for the statute of limitations to run for good faith allocation. That’s five years of uncertainty.”

“Since IRS can nearly double its take where intellectual property allocations are involved, including designs, secret processes, trade secrets, copyrights, and any special ‘intangible personal property’ created in the business, this can be a rich target area for agents bonused on what they recover, and an easy area for sloppiness at time of sale,” noted Smyth.

Jensen observed, “For every million dollars of sale price, there’s likely a $370,000 tax cost instead of a $200,000 tax cost at the federal level. On top of that, the Net Investment Income Tax of 3.8%. The person who pays taxes all their life and sells their business now pays more than 50% tax on these intellectual assets in California, New York, and other key states.”

Jensen and Smyth affirmed the value of deferring the tax for 30 years, monetizing the deferral with a nonrecourse loan when desired, waiting for the statute of limitations to pass, and paying the tax in 30 years with cheaper dollars. This way, retirement is secure, 93% or more of sale dollars continue working for sellers, and IRS agents are not motivated to challenge sale allocations when the tax is due in 30 years. “As word gets out, the phones are ringing off the hook,” Jensen and Smyth agreed.

About Custom Structured Settlements, LLC

Custom Structured Settlements, LLC helps with structured settlements of taxable transactions. Its services ensure enormous tax savings, asset protection, wealth preservation and legacy planning. For more information, please call (317) 268-8880, or visit www.customstructuredsettlements.com. Custom Structured Settlements, LLC is located in the SePRO Tower, 11550 N. Meridian Street, Suite 125, Carmel, IN 46032.

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