To encourage innovation, the state of Indiana created the Patent Income Tax Exemption. This exemption offers Indiana entrepreneurs and small businesses a break on their Indiana state income taxes paid from using, licensing, or selling patented products and ideas.
Indiana individuals, small businesses with less than 500 employees – including those in the individual’s or corporation’s affiliates, and nonprofit organizations or corporations that receive patents in 2008 or beyond may exempt the income they receive from each particular qualified patent for 10 years – up to a maximum of $5 million per year. A taxpayer may claim up to 50% of income the first five years, after which the exemption begins to taper off, eventually expiring after 10 years as per the schedule below:
- Years 1 through 5 = 50%
- Year 6 = 40%
- Year 7 = 30%
- Year 8 = 20%
- Year 9 and 10 = 10%
Patent income that qualifies as exempt includes licensing fees or other income received from the use of a patent, royalties (i.e. those received from the infringement of a patent), certain income from the taxpayer’s own use of the qualified patent to produce the claimed invention, patent sale, and “patent-covered” product sales.
This law contains a few restrictions and particular requirements, including the following:
- The exemption does not cover design patents (only utility and plant patents)
- The taxpayer must be domiciled in Indiana to claim the exemption
- The exemption may not exceed $5 million in a given year
- The credit may only be claimed by the owner or seller of the patent (not both parties of a patent transaction) to encourage innovation versus patent-income recycling
- Patent income is limited to only the income received by the Indiana individual or small business
- Patent-covered product sales are limited to the fair market value of the patent
While this law offers a significant advantage for Indiana innovators and entrepreneurs who have derived income from patents, it can also be a daunting and complex topic for many. If you would like to discuss whether you are eligible for this exemption, or if you have any other questions about intellectual property and technology tax matters, please call the Barnes Dennig team at 317-572-1130 or click here to contact us. We look forward to assisting you!