Dear Doc:
I hear that in the Tax Cut and Jobs Act (the “Trump Tax Law”) inventors, authors, and other creators of intellectual property got screwed, contrary to the intent of the Founders, as expressed in Art. I, Sec. 8, Cl. 8 of the United States Constitution. What’s up with that?
Signed,
Screwed-Over Inventor
Dear Screwed:
Yup! You’re right. The President and Congress did a number on every individual creator of “intangible property”. Under the Constitution, Congress is supposed to “promote the progress of science and useful arts.” Our Founders set up the patent and copyright system to reward inventors and authors. Then Congress said that inventions and certain works of authorship would be capital assets, and when they were sold, should be taxed at lower long term capital gains rates. That very much lined up with the Founders’ scheme.
Then along came our present batch of elected officials. The President and Congress seem not to know about the Founders’ intent, and seem not to have much respect for science or the arts, either. So they passed the Trump Tax Law. According to IRC 1221(a)(3) every “patent, invention, model or design (whether or not patented),… secret formula or process, … copyright, … literary, musical, or artistic composition, … letter or memorandum, or similar property” that is held by the creator or that was acquired from the creator is not considered a “capital asset”, and as such, income from the sale of these properties is no longer taxed at the maximum rate of 20%, but, rather, at the taxpayer’s marginal rate, which may be as high as 37%. (Music still gets special capital gains treatment…it’s good to have powerful lobbyists!) Hey Washington! Great job promoting progress, says the Doc!
When you line this little gem up against the fact that a corporation gets taxed at a maximum rate of 21% under the Trump Tax Law (down from 35% before the Trump Law), it appears that the little guy has taken it on the chin (or somewhere else on his person) yet again.
With this tax hit, the Doc advises that it is more important than ever for individual inventors and companies to take advantage of the federal research and development tax credit. This creates a tax credit for developing or improving products, processes, or software in a variety of industries related to hard sciences (chemistry, physics, biology, etc.), engineering or computer science. The Protecting Americans from Tax Hikes Act of 2015 made this credit permanent, and implemented a few extra incentives for small businesses, such as the ability to take the credit against payroll taxes, and a suspension of the alternative minimum tax floor.
So there you have it, Mr. Inventor. Claim those credits while you can, since in government-speak, “permanent” is only until they blow up the budget again, and don’t count on any promotion of progress from our elected officials any time soon. In the famous (and not capital asset) words of the Doc’s fellow-Philadephian, Bobby McFerrin, “Don’t Worry, Be Happy!”
Have an important question about intangible intellectual property? Get in touch with the attorneys at LW&H. They’d love to help promote your progress.
Until next month,
The “Doc”
— Lawrence A. Husick, Esq.