Strategic Use of Intellectual Property

Intellectual Property (IP) can be strategically used to reduce taxes through various tax planning methods. This approach typically involves leveraging IP assets to reduce taxable income, increase deductions, or take advantage of favorable tax regimes. Below are some considerations to discuss with your advisor:

1. Using the Research & Development (R&D) Tax Credit

The R&D tax credit is a powerful tool for companies developing new technologies, processes, or IP. The credit is available for expenses related to research and development activities, which can include the creation of patents, software, and other types of IP.
Eligible expenses include wages, supplies, and contract research costs related to developing or improving a product or process. The R&D credit can reduce the tax liability dollar-for-dollar and is particularly beneficial for companies investing in innovation.
For example, a software company developing new software tools could claim the R&D credit for the costs of programming and testing its products.

2. The Global Intangible Low-Taxed Income (GILTI) Provision

Under the Tax Cuts and Jobs Act (TCJA) of 2017, the U.S. introduced the GILTI provision, which applies to income derived from certain intangible assets held by controlled foreign corporations (CFCs).
GILTI is designed to tax the low-taxed income of CFCs, but companies can receive a foreign tax credit to offset some of this tax liability if the IP is being taxed in a foreign country at a higher rate. While this doesn’t directly reduce U.S. taxes, companies can use the GILTI regime strategically to manage international tax liability and encourage the holding of IP in favorable jurisdictions.
Additionally, U.S. corporations may benefit from a deduction of 50% (as of 2025) of GILTI income under certain conditions, reducing the effective tax rate on foreign IP income.

3. Patent Box Equivalent: Domestic Manufacturing Deduction (Section 199A)

While the U.S. does not have a Patent Box regime like some other countries, there is a tax incentive for businesses that manufacture products in the U.S. under Section 199A of the Internal Revenue Code. This section allows a 20% deduction on qualified business income for pass-through entities, including partnerships, LLCs, and S corporations.
If a company develops IP (e.g., patents) and manufactures products based on that IP in the U.S., it can use Section 199A to reduce its taxable income.
Note that this deduction is limited to income derived from domestic manufacturing activities, so the specific structure of the business and IP must align with these requirements.

4. Amortization of IP for Tax Deductions

In the U.S., businesses can amortize the cost of acquiring or developing IP over a 15-year period for tax purposes. This means that companies can spread the cost of IP (e.g., patents, trademarks, copyrights) over several years and take a tax deduction each year for that amortized amount.
The amortization process reduces taxable income, providing a tax benefit over time. This applies to both internally developed IP and IP acquired from external parties.
For example, if a company buys a patent for $1 million, it can amortize the $1 million over 15 years and deduct approximately $66,667 per year from its taxable income.

5. Transfer Pricing and IP Licensing

Transfer pricing refers to the pricing of goods, services, or IP transferred between related entities (e.g., subsidiaries or affiliates). A company can use transfer pricing techniques to allocate IP income to jurisdictions with more favorable tax rates, reducing the overall tax burden.
By structuring intercompany agreements and licensing arrangements where the IP is owned by a subsidiary in a lower-tax jurisdiction, a company can reduce its overall U.S. tax liability.
However, transfer pricing strategies must comply with the arm’s-length principle, meaning the transactions must be priced as if they were conducted between unrelated parties. The IRS scrutinizes transfer pricing to ensure it reflects economic reality.

6. Foreign-Derived Intangible Income (FDII) Deduction

Another provision of the Tax Cuts and Jobs Act (TCJA) is the FDII deduction, which provides a tax incentive for U.S. companies that derive income from the use of IP outside the U.S.
Under FDII, companies can receive a deduction for foreign-derived intangible income (such as royalties, licensing income, and sales of goods or services using IP) that is earned from foreign customers.
This allows companies to reduce the effective tax rate on income derived from the exploitation of their IP abroad. The FDII deduction can be up to 37.5% of foreign-derived income, effectively lowering the tax rate on foreign IP income to around 13.125% (in 2025).

7. Selling or Transferring IP to Lower-Tax Jurisdictions

If a company holds valuable IP, it can potentially sell or transfer the IP to a subsidiary in a jurisdiction with a lower tax rate. The U.S. taxes capital gains on the sale of IP, but the company may be able to reduce its overall tax liability by strategically transferring IP to a tax-friendly jurisdiction.
This strategy often involves setting up a foreign subsidiary in a jurisdiction that has favorable tax rates for IP income, such as the Netherlands or Ireland, where IP-related income can be taxed at lower rates.
Companies must ensure that such transfers comply with U.S. tax laws, particularly with regard to transfer pricing rules and the Foreign Investment in Real Property Tax Act (FIRPTA).

8. Tax Credits for U.S. Manufacturing with IP

Companies involved in U.S. manufacturing using their own IP may qualify for tax incentives related to domestic production. As part of broader efforts to encourage U.S.-based manufacturing, businesses can receive tax credits and deductions related to manufacturing processes, including the use of IP in those processes.
This can further reduce taxes, particularly if the company is engaged in significant manufacturing activities that rely on their patented technology or IP.

9. Capital Gains Treatment on Sale of IP

If a company sells IP (e.g., patents, trademarks, or copyrights), the sale may qualify for capital gains treatment, which is generally taxed at a lower rate than ordinary income. This could result in a lower tax liability when the company realizes a profit from selling or licensing its IP.
To qualify for capital gains treatment, the IP must be held for more than one year and meet other specific requirements.

10. State-Specific Incentives for IP

In addition to federal tax provisions, individual U.S. states may offer incentives for companies that develop or hold IP. For example, some states offer credits for R&D activities, patent-related activities, or business investment in IP-heavy industries.
Companies should explore state-level tax credits, grants, and other incentives that might apply to their IP and R&D efforts.

Conclusion

In the United States, there are numerous ways to utilize IP for tax reduction, from claiming R&D tax credits to taking advantage of favorable tax provisions such as FDII and GILTI. Additionally, strategic structuring of IP ownership, licensing, and transfer pricing arrangements can further help companies reduce their tax burdens.

The application of these strategies depends on proper adherence to IRS regulations, documentation requirements, and specific circumstances of the business. The IRS scrutinizes IP tax planning, particularly when transfer pricing or cross-border IP transactions are involved, so businesses must ensure compliance with all tax reporting and substantiation requirements.