March 18, 2019

March 18, 2019

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Planning for Potential Significant Tax Breaks

On July 29, 2015, two members of the U.S. House of Representatives1 introduced draft legislation for public comment that would provide U.S. companies with a significant tax break on profits derived from qualifying intellectual property (IP) – including patents, inventions, formulas, processes, designs, know-how and any product that is produced using any such IP.2 The goal of this legislation, known as the Innovation Promotion Act of 2015, is to stimulate innovation by U.S. companies and to help keep high paying jobs in America. Various European countries have introduced similar legislation in recent years.3 Given its bipartisan support, the tax break on income derived from qualifying IP may be enacted into law in one form or another sometime this fall. 

The proposed legislation would enable a company to deduct 71 percent of income derived from qualifying IP or 71 percent of their taxable income, if less.4 This translates to an effective income tax rate of about 10.15 percent on income derived from qualifying IP, down from the top corporate income tax rate of 35 percent. Even if this effective income tax rate is raised above 10 percent during the legislative process, this can still result in significant tax saving on income derived from qualifying IP.

The proposed legislation indicates that the tax savings would be effective for tax years after the date of enactment. Companies who already own patents and have pending patent applications at the United States Patent and Trademark Office (USPTO) on their products or services stand to benefit under this legislation. Companies who don’t own patents or don’t have pending patent applications at the USPTO on their products or services should consider whether they can apply for patent protection on their products or services. Since there are very strict non-extendable deadlines for filing patent applications after a product or service has been offered for sale, sold, or made publically available, companies should now consider what additional patent protection they can obtain for their products or services. Companies should also consider continuing to pay maintenance fees on issued patents that were previously considered to have lower value.

Thus, even before this legislation is enacted, companies should review their product innovation pipeline and consider stepping up their U.S. research and development programs together with their patent application and other IP filings to maximize their opportunity to benefit from this potentially significant tax break.

1 U.S. House of Representatives Charles Boustany (R-LA) and Richard Neal (D-MA).

2 See here.

3 For example, Belgium, Cyprus, France, Hungary, Luxembourg, Netherlands, Spain and the United Kingdom have introduced similar schemes.  See, e.g.

4 According to the U.S. House Ways and Committee website, the proposed formula for determining how a U.S. company would compute its taxes on IP-related income is: (1) Identify gross receipts attributable to certain technology-based IP, (2) Subtract any related costs to determine the net profit from the IP, (3) Multiply this IP profit by the ratio of domestic R&D costs to total costs, and (4) Apply a 10 percent tax rate to the resulting profit (instead of the general 35 percent corporate rate).

© 2019 Neal, Gerber & Eisenberg LLP.

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About this Author

Adam H. Masia, Intellectual Property & Technology Transactions attorney, Neal Gerber law firm
Partner

Adam H. Masia, a registered patent attorney, assists clients in obtaining and maximizing the value of their patent portfolios and other intellectual property.

Adam began his career participating in more than 50 patent infringement lawsuits involving a wide spectrum of technologies. This patent litigation experience enabled Adam to develop a highly strategic approach to creating valuable patent portfolios and using those portfolios to maximize revenue. Adam’s current expansive patent prosecution practice encompasses helping clients in developing patent procurement strategies and...

312-269-8048
Thomas E. Williams, Neal Gerber Eisenberg law firm, patent attorney, NASA engineer
Partner

Tom is a registered patent attorney and a former rocket engine turbomachinery engineer on NASA’s Space Shuttle Main Engine (SSME). Tom’s experience supporting over 47 successful space shuttle missions led to a position designing the liquid oxygen and liquid hydrogen turbopumps for the low cost, but more powerful, RS-68 liquid main engine for the Delta IV Evolved Expendable Launch Vehicle (EELV), which continues to fly critical satellite missions today. Tom’s 12 year engineering career before law school also includes three years designing military gas turbine engine components and natural gas fuel control valves. 

As a partner in Neal Gerber Eisenberg's Intellectual Property group, Tom advises large corporations, start-ups and individuals on a wide range of technologies, including rocket engines, jet engines, electromechanical fuel controls, aerial fire-fighting equipment, fire protection garment technologies, electric heaters, healthcare data management technologies, surgical and dental instruments, GPS-based technologies, retail consumer products and product dispensers, restaurant processes, furniture structural supports, UV curing technologies, and numerous web and/or software applications. Tom’s practice includes advising clients on how to protect, enforce, and monetize their intellectual property, and includes providing worldwide patent and trademark procurement and portfolio management, licensing, and merger/acquisition due diligence management services. Tom also handles IP matters in the federal courts, and before the Patent Trial and Appeal Board (PTAB) and the Trademark Trial and Appeal Board (TTAB).

(312) 269-5355