With the exception of a brief period during the late 1980's, capital gains have been taxed at a lower rate than ordinary income since 1921. Currently, the federal tax rate applicable to long-term capital gain is 15%, which is substantially lower than the highest individual federal income tax rate of 35%. Consequently, the distinction between ordinary income and capital gain is of importance to most, if not all, taxpayers.
In making the distinction between ordinary income and capital gain, taxpayers and tax practitioners alike often overlook the preferential tax treatment accorded to transfers of certain intellectual property. For instance, under Section 1235(a) of the Internal Revenue Code1, amounts received from the sale or exchange of all substantial rights to a patent are treated as long-term capital gain. Likewise, payments received in exchange for know-how and trade secrets qualify for capital gain treatment, provided that the taxpayer transfers all substantial rights in the information and is not a professional developer of intellectual property.
As a result of the rapid pace of technological and other advances in the medical field, medical professionals should be not only aware of the tax consequences of transferring intellectual property, but cognizant of how to best structure such transfers to qualify for capital gain treatment. This article will summarize the tax consequences associated with transfers of patents, know-how, and trade secrets and how such transfers can be structured to qualify for capital gain treatment.
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Click here to read the full article published in Round-up by Maricopa County Medical Society.