Patent Expenses

[yeknod]

TP has had expenses applying for a Patent.  I have read many articles on the subject.  

What I read was TP can deduct the expenses in the year occurred or elected to amortize them over 15 years?

Also, if the expenses can be deducted, are legal fee included in amounts to be deducted or do they have to be amortized?

Is that correct?   The TP don't have any income.  The business depends on the Patent.

Thanks in Advance!

[linette]

Sounds like start-up costs.

[Just-Lisa-Now-]

So the business hasn't begun yet?  So would those become start up expenses in the year the business actually starts?

[yeknod]

I found this:

"Looking For Deductions and Exclusions
When it comes to tax treatment of patent costs, many related expenses are deductible, including attorney’s fees. Such legal fees are considered part of research and experimental costs, as defined by the IRS. Other deductible expenses include the costs of applying for the patent and the research required for patent development. If you had to hire outside experts, like an engineering firm, to develop the patent, those expenses, including salaries, are deductible as well. The cost of the materials used in creating the patent are also deductible expenses."

[yeknod]

I found this:

"If you decide to amortize your patent rather than deduct expenses in the first year they were incurred, the patent falls under the category of intangibles for IRS purposes. These expenses are usually amortized or written off over the period for which the asset is in use, generally for 15 years. Amortization is similar to depreciation and may end up saving you money instead of choosing to deduct all expenses in one year. Consult with an accountant experienced in patent law to decide whether amortization or deduction makes the most sense for you."

[linette]

Start-up costs are intangibles and what you found states to consult an accountant familiar with patents.  I think there is your answer.

[Just-Lisa-Now-]

This is all assuming youre "in business"....sounds like the business hasn't really started yet....  are they selling something or offering services?

[yeknod]

They are now but I am talking about 2019 before they began selling anything.

[Just-Lisa-Now-]

So I would think those would be start up expenses on the 2020 return.

[yeknod]

What about the 2019 return when the expenses occurred?

[msmith7305]

I believe Section 195(c) specifically excludes 174 (R&D) expenses from being start up expenses.

[yeknod]

So, how would you handle it?  Deduct in the year of the patent expense?

[linette]

I would consult with another accountant or an attorney that deals with patents.

Where I suspect it would be start up costs and follow the rules for start up, like you, I am not sure.  I also am not sure that you have given us enough information.

[linette]

This would be where the consult with professional that knows would be important.

I think there is a technicality here somewhere that needs to be understood before the right answer is known.  I am not sure enough information has been given.

[yeknod]

how would you handle the r&d expenses for 2019?

There are no sales for 2019 just patent expenses

[linette]

I don't know that you will find someone here that is knowledgable in the area you are looking at.

Here is a exerpt that I found with a quick google search that confirms this is very trick tax law.

In most cases, you can only deduct these expenses in the tax year in which you incur them. If you didn’t deduct those expenses at that time, the only way you can deduct them in later years is with smart patent accounting and with the consent of the IRS Commissioner. 

I have know idea what this clients does, how long they have been in business, how much risk is involved if the wrong decision is made.  But to me this sentence says that there can be high conseqences if this is not done correctly and is caught.

The immediate question that comes to mind with your description is:  Does it matter if the business is a going concern (operating) or not?  Then I would be looking for specifics as to what are patent costs, start-up costs, research and development costs and how to expenses of this client fit into those categories? 

Without a professional willing to mentor on this so that I could make sure of what I was doing, I would probably decline the client.