Innovation Promotion Act Could Mean Income Deductions for Patents and Other Intellectual Property

August 11, 2015
Post by Jill N. Link, Pharm.D.


Current tax laws do not permit deductions or other preferential tax treatment for income derived from intellectual property. This may change based on proposed tax reforms. On July 29th the House Ways and Means Committee members Charles Boustany (R-LA) and Richard Neal (D-MA) released a legislative proposal for public comment outlining the Innovation Promotion Act. This Act would, in part, provide a deduction for income generated from patents and other intellectual property. Congressman Neal analogizes this proposed improvement to the tax code to the transition from "a rotary phone [into] a smart phone world.‚¬


The proposal is referred to as an "innovation box"designed to attract and retain research and development ("R&D‚¬) investments and intellectual property within the U.S. This is a result of many corporations having multi-national presence moving R&D outside the U.S. due to more favorable tax considerations and ability to shift profits. The net effect of the proposed deductions for income generated from patents and other intellectual property would be reduced effective tax rates for many corporations with R&D. Congressman Boustany's office reports that currently "the United Kingdom, Ireland, Belgium, the Netherlands, Luxembourg, Hungary, Spain, Italy, and China utilize some form of an innovation box with rates ranging from 5-14%."The proposed tax code revisions would subject innovation box profit (a defined term under the legislation) to a tax rate of 10% instead of the general corporate rate of 35%.


The proposed innovation box is expected to accompany other tax reform plans to be considered by Congress this fall. Additional information about this proposal is available on the Ways and Means Committee site and includes a section-by-section summary.


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