Under the TCJA, patents, inventions, models or designs
and secret formulas or processes no longer qualify as capital assets, nor do they qualify as property used in a trade or business.
As a result, after recapture, all gain on these assets appear to be ordinary.
Fortunately, the limitation on capital gain treatment
of self-created IP does not apply to self-created copyrights, literary, musical, or artistic compositions and similar property.
The IRC Section 1221(b)(3) election remains unchanged by the new law.
In addition, Congress retained the narrow exception provided by
Section 1235 which allows some inventors and investors the opportunity to obtain capital gain treatment when transferring
"all substantial rights" to a patent. Unfortunately, Section 1235 does not apply to self-created
non-patent property; e.g., inventions, models or designs (unpatented), or secret formulas or processes - it only applies to
In light of the foregoing, patent owners should consider transferring "all substantial rights"
to patents. In addition, self-created IP owners should consider selling the ownership of the company and
not its assets. Regardless, IP owners should continue to identify all elements of the business which may
be capital assets, e.g., goodwill, workforce-in-place, trademarks, customer-based intangibles, supplier intangibles, etc.
Offices of Mark E. Wiemelt, P.C. do not render tax advice. Therefore, taxpayers should consult with their
tax advisors or professionals.