To determine how to report patent income on a tax return one should segregate business income from non-business income. The B&O tax applies to income generated from patent royalties and patent sales if the said income is considered regular, recurrent, and an ongoing part of business activities. Examples of taxable patent income are the following:
• If the inventor earns patent royalties for the right to use a patented process or to manufacture a patented product.
• If the income is from the sale of a patent by the inventor.
• If an investment firm generate patent royalties from patents and other intangible assets (such as copyrights) it owns for investment purposes.
In these instances, the patent income is considered an ongoing part of the business operations because it is necessary to continue the business.
Another consideration is to determine where the owner resides. B&O tax applies to patent income if the owner lives or has a commercial residence in Washington.
Banking, loan, security and other financial businesses receiving patent income is also required to pay B&O tax under the classification - service and other activities.
Exempt from Income Tax
There instances that income generated from patent royalties is exempt from income tax. This is the provision under Section 234 TCA 1997. There are numerous conditions to be able to implement this rule. For instance:
- The original inventor must be the recipient of the royalty,
- The patent royalty must come from a manufacturing activity ( other than IFSC and certain Shannon Free Zone activities) in the State or elsewhere, or in case of a non-manufacturing activity, it must be paid by a person not connected to the recipient.
- Another instance when patent royalty is exempt is if the patent income is a non-business income.