Outside of the purchase of a home, an automobile is the main titled asset most people buy. An automobile can cost from $10,000 to $50,000 or more. Taxpayers get no deduction when they buy an automobile, and unless the vehicle is purchased wholly for business use, even the interest is not deductible. We have always found it an unusual fact that people think nothing of spending $30,000 for a vehicle on which they get no tax advantage, no deduction, and only ordinary income tax on sale (if it should sell at a profit). Yet at the same time many people don't know that the tax treatment of a patent is the opposite of that for a personal vehicle.
The costs for a patent, including the cost for research, prototypes, experiments and the like, are fully deductible. So is the money you pay your Patent Attorney to apply for and prosecute the patent. Even more amazing is the fact that the sale of a patent results in INSTANT CAPITAL GAINS, with no requirement for a one-year holding period. There has always been an ingrained reluctance to accept the highly unusual tax benefits to inventors which have been around for decades. In extreme cases the same person who would invest $30,000 in a vehicle upon which no positive return is expected, would worry about spending $5000 - $10,000 on a capital asset that could earn them an instant 15% federal capital gains tax rate on the sale (or licensing so as to constitute a sale).
I have talked to inventors who constantly seek an investment partner to contribute $5,000 to $10,000 to pay for the patent, and thereby risk losing the invention to the investor, even though they drop $20,000 to $30,000 to buy a new vehicle every year. In nearly every case where an inventor meets an investor, the battleground is set and its only a matter of asking "when" the war will start. Investors always want to "buy" and "own" the inventor and all of his inventions for all time. The inventor always wants cash flow with no risk and often simply doesn't believe in his own invention.
The sad irony here is that only the inventor knows his invention inside out. Only the inventor's desire to make the product the best it can be will maximize the product's cash flow. Absent specialized cases where millions have to be spent on research to "finish" the invention, inventors should almost never try to bring someone in to invest at the patent level. Generally, the inventor (who has the ability to generate capital gains on sale of the patent) should always keep title, and never assign the patent application or patent. If the inventor wants to manufacture, he should set up a company for purposes of limited liability and manufacture while making ordinary income from the products. Then, if a buyer comes along and buys the patent from the inventor, a big capital gains payday might be possible.
Generally never never never put a patent into a corportation as the ability to obtain capital gains will either be destroyed or delayed. After all, a buyer might want to buy the corporation and then again he may not. The buyer will almost always want to buy the patent and where the patent is essentially where nearly 100% of the value lies, then that same amount will flow into the inventor's pocket at the lower captial gains rate directly.
Further, most inventors also oftent forget that a patent application is a title document it is usually complete evidence of ownership. Good enough for the IRS. Good enough for a buyer to show purchase and good enough for the inventor to show that a sale has occurred. Without such a title document, any invention is subject to loss as soon as it is written down. The federal patent system and its rules protect the inventor by enabling a mechanism to proove invention, and priority, in exchange for the Inventor's disclosure of his invention to the government, and ultimately the world.
Of all the investments which can be made, patents are one of the few with a limited, yet deductible cash investment, and yet whose return is only limited by the nature of the value of the invention itself. Many wealthy investors put millions at risk by pouring them into investments hoping to generate some significan percentage of tax deduction to offset other income. If wealthy investors had the technical knowledge, passion for inventing, and desire to serve the public by making better products, the other investment opportunities would dry up. But most high dollar investors aren't inventors, and don't value what they can't buy. So, inventors, value your invention and its patent asset, and the high returns commensurate with your contribution to the body of knowledge in your technical field.
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