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New tax law lowers corporate tax rate on intellectual property

The Tax Cuts and Jobs Act of 2017 appears to contain good news for businesses in Colorado that earn income from intellectual property. Previously, corporations might pay as much as 35 percent in taxes on royalties from patents and other intellectual property. Tax reform has lowered the corporate tax rate to 21 percent, but the act specifies a lower rate of 13.125 percent for income from intellectual property.

According to the new tax code, this rate will last for seven years. A slight increase to 16.4 percent will apply thereafter. This feature of the tax law might induce corporations that are currently holding their intellectual property assets in overseas companies to bring them back  to the United States. Such companies might gain a lower tax rate domestically while actually bringing a taxable asset into the country.

Another provision of the tax law, however, might have a negative impact on individuals who hold patents. Under the old system, tax law viewed patents held by individual creators as capital assets. When people sold these assets, they were taxed at the lower capital gains rate. The new tax act now takes away the status of capital assets from individuals, which could expose their sales of intellectual property to higher tax rates.

With so many tax changes on the horizon, a person or company that owns intellectual property might want legal advice. An attorney could evaluate the tax consequences of the sale or purchase of patents or the creation of a licensing agreement that produces royalty income. After researching how the law could apply to a specific business situation, an attorney could recommend how to time a transaction or plan for the taxation of the proceeds.

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