If you are in possession of intellectual property, then you know how important obtaining a valuation for your intellectual property is. However, you might not know how your valuation can be affected by taxes, or what types of taxes your intellectual property might be subjected to.

What is Intellectual Property?

Intellectual property (IP) is property that is created via mental production (e.g., music, literature, art, inventions, symbols, words, and discoveries). Additionally, IP is unique in that the creation has exclusive rights that are recognized and protected. Because IP has the potential to make money, there are taxes associated with IP income and transfers.

Making Profits

When it comes to IP, profits may be acquired through selling the rights to IP, selling products or services directly related to the IP, and/or by collecting royalties from the IP. Profits may also be made through the transfer of intellectual property (which is one of the main considerations when valuing IP).

Intellectual Property Valuation

The valuation of IP refers to assigning a monetary value to intellectual property. The purpose of assigning value to IP is based on establishing pricing for the IP, collateralization, and tax purposes. Valuation is based on a number of factors, including the predicted amount of profit of the IP; current market factors; and foreseeable amounts of IP growth.

Valuation of Intellectual Property and Taxes

Taxes on intellectual property are far from straightforward; rather, they are a collection of principles and criteria that are specific to certain corporations and/or individuals in certain cases.

As an example, transfer price taxes deal with the cost of doing business between separate divisions of a large multinational corporation (MN). Typically when an MN permits its divisions to operate as separately owned corporate entities, each entity will assume responsibility for its return on capital invested. These related entities will negotiate the price of intellectual property exchanged in order to ensure a level of profit to the selling entity.

Under guidance by the Internal Revenue Service (pursuant to Section 482 of the I.R.C.) specific requirements are set forth for the methods used in transfer pricing transactions. Although the guidance provided is technical, the bottom line is that the IRS seeks to have any IP sold between a domestic unit of an MN to a foreign unit of the MN sold at fair market value. Any approach taken to value IP in a transfer pricing transaction needs to be documented pursuant to I.R.C. Section 6662 in order to provide a basis for the taxes payable on the transfer.

Filing Taxes for Intellectual Property

If you own the rights to intellectual property and have profited from these rights, you’ll be subject to filing taxes on your IP. You will pay an income tax on any income derived from your IP, as well as a capital gains tax in situations of IP income where a capital gains tax is applicable.