Monetizing intellectual property (IP) presents complex tax challenges, particularly in determining whether proceeds are taxed at favorable capital gains rates or higher ordinary income rates. Sales of IP assets must transfer substantial rights to qualify for capital gains treatment, while income from licensing agreements is generally taxed as ordinary income. These distinctions require careful transaction structuring and strategic tax planning to optimize outcomes and ensure compliance with tax laws.

In the November/December 2024 issue of The Licensing Journal, Gray Reed Partners Joshua Smeltzer and Brian Clark provided expert insights into the challenges and opportunities in navigating these tax issues.

Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua Smeltzer focuses his practice on defending taxpayers in all stages of civil and criminal tax proceedings, including sensitive audits and examinations. Joshua frequently represents corporations, complex partnerships, family offices, estates and trusts, and high-net worth individuals. His practice encompasses a variety of industries, with special expertise in real estate, energy, insurance, private equity, digital assets and blockchain technology.

Brian Clark is a corporate and tax lawyer who regularly advises closely-held businesses, partnerships, family offices, real estate developers and high-net-worth individuals regarding tax structuring, business planning, asset protection, key person compensation and succession planning. He also has experience drafting private letter ruling requests and opinions regarding the federal income tax consequences of material transactions.

Excerpt:

Developing intellectual property requires both skilled labor and large amounts of capital. Recouping the developer’s initial investment and earning profits typically requires monetizing the assets by either sale
of license. In addition to general business concerns like asset and market share protection, developers should plan for the tax consequences of their monetization transactions because, at its core, tax planning
is cash planning. Legitimate federal income tax planning under the Code usually involves two levers. The first lever is structuring a transaction to achieve a specific character of gain or loss. Second, thoughtful planners might utilize techniques to accelerate or defer a taxpayer’s recognition of gain or loss.

Read the full article here.