Can I Deduct R&D Expenses for a Patent?

Everyone who begins a business is starting something new, but when you’re in the business of creating something to be patented, you go a step further: you’re inventing something new.

It can take time to develop a new product or process, and in the meantime you’re likely to incur expenses in creating it. 

There’s expenses that are directly related to creating the patent, and other ancillary expenses like driving your car for business purposes, or meeting with potential partners or investors.

All of these expenses add up, and you’re likely to ask: If it takes so long to create an income from this patent, what kind of current benefits can I receive?

Luckily for you, there are some options our kind government has allowed you to take advantage of. 

Generally when you create something new, you have to capitalize the expenses and then deduct them annually through the process of either depreciation or amortization

This is in contrast to expensing an ordinary payment for an item in full in the year it is paid for. 

And while most of these expenses that are directly related to the patent, like legal fees, must be capitalized into the cost of the patent, and then amortized ratably over a 15 year period starting from the time the patent is allowable, you may take advantage of a provision for Research and Development costs.

That’s right, for Research and Development expenses for the patent, you may elect to deduct them in the year incurred, or capitalize them into the cost of the patent and then amortize them like the legal fees.

To make this election you simply deduct the Research and Development costs on the business portion (Schedule C if you are a disregarded entity) of your tax return in the first year you incur any; no special statement is required to be attached to your return.

Once the election is made, you must continue deducting Research and Development costs every year. You may not switch back and forth between deducting and capitalizing the expenses.

While it seems to be more beneficial to deduct the expenses immediately, one reason you may want to consider capitalizing the expenses is if you do not need the current write-off.

If your current income is low, and you expect your income to grow significantly and place you in a higher tax bracket when the patent is in service, you may want to consider capitalizing the expenses and taking the write-offs in future years.


To have your question featured in a future article, please leave a comment below. 

This article should not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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