Indiana has a law intended to attract the development of businesses and lead to an increase in high-tech businesses and the higher-paying jobs they bring with them.
Indiana Code §6-3-2-21.7, which went into effect Jan. 1, 2008, encourages innovation in Indiana by giving entrepreneurs and small businesses a break on Indiana state income taxes. This law effectively allows "qualified taxpayers" an exemption for income generated by using or selling patented products and services.
A qualified taxpayer can be an individual or small business with no more than 500 employees or affiliates.
The qualified taxpayer is entitled to this exemption for licensing fees or other income received for the use of a qualified patent, royalties received for the infringement of a qualified patent and receipts from the sale of a qualified patent. However, the law makes it clear that patent-covered product sales are limited to the fair market value of the patent. For example, if a manufacturer sells a machine that was made up of multiple parts but one of those parts had patent protection, the law provides a tax exemption for the fair market value of the patented part only, not the selling price for the entire machine sold. Also, a qualified taxpayer is the owner or seller of the patent, and not the buyer or licensee. This restriction will avoid both parties in a patent transaction from benefiting from the exemption.
The law allows these qualified taxpayers to exempt up to half of the income received from patents issued after 2007, but there are some limitations. For example, the amount of the exemption may not exceed $5 million in a given year. Also, the law places no limit on the number of patents that can be used in combination to reach the total annual exemption.
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Intellectual property is one of our greatest assets. However, companies continue to export this resource. Indiana's new patent income law is designed to keep that resource here in America, and more particularly, in Indiana. Businesses should join in the effort by taking advantage of this unique tax incentive.
