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Can I capitalize Patent and R & D costs in an LLC

Rob Koelsch's Profile

Accounting For Patent CostsMembers of LLC do not wish to take expense write off, cannot use losses. LLC will likely be held to sell off patent eventually

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Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

Rob,

You may be able to do so; I'm assuming you mean "for tax purposes". I also assume you're acting as a partnership, not a corp, from the "use losses" comment.

As to whether this is capitalizeable, the good news is the feds are often happy to let you defer losses. Check IRC 174 with regards to R&D expense deferment through capitalization. When reading, note the use of the word "may" instead of "must" in section (a). You may fall into (b) by your own election.

Note...I'm a finance guy, not a tax guy, so be sure to check with your preparer.

KP
http://www.law.cornell.edu/uscode/text/26/174

Steve Breitman
Title: President/CEO
Company: Mindful Business Solutions
(President/CEO, Mindful Business Solutions) |

A patent should be recorded as an asset on your books regardless of the type of business entity you are. Being an LLC vs. a C Corp vs. some other entity doesn't change the accounting principles involved. The question that goes more to the heart of your question is the method for amortizing patents. The tax method may be different than the book method. I suggest you consult with your tax accountant to get the correct answer.

Will Hogoboom
Title: CFO
Company: ZBB Energy
(CFO, ZBB Energy) |

Under GAAP, only IP purchased in a business acquisition can be capitalized. R&D expenditures are always expensed under GAAP. If you are not required to follow GAAP, I guess you can do anything.

Michael S Tan
Title: Director of Finance
Company: Unbounce
LinkedIn Profile
(Director of Finance, Unbounce) |

While generally you need to expense all R&D, but with regards to internally developed software, capitalization is allowable if certain conditions are met.

US GAAP (ASC 350-40-25) is quite explicit: “-1 Internal and external costs incurred during the preliminary project stage shall be expensed as they are incurred. -2 Internal and external costs incurred to develop internal-use computer software during the application development stage shall be capitalized. -3 Costs to develop or obtain software that allows for access to or conversion of old data by new systems shall also be capitalized. -4 Training costs are not internal-use software development costs and, if incurred during this stage, shall be expensed as incurred. -5Data conversion costs, except as noted in paragraph 350-40-25-3, shall be expensed as incurred. -6 Internal and external training costs and maintenance costs during the postimplementation-operation stage shall be expensed as incurred.”

For IFRS, see IAS 38 for similar guildelines.

Its a little murky, but quite arguable, as with most fun accounting issues.

As everyone says, check with your tax guys and auditors.

(Agent, JKS Solutions, Inc.) |

As far as the patent goes, you will be incurring costs for potentially years to come as you move through the stages, legal due diligence, fees, professional fees and consulting, documentation, etc. All these costs can be be capitalized as a project in process, much like construction in progress. At the point in time you determine you have a failed patent application, you will need to write those costs off to expense, just as with any other project that fails.

I'm not going to try to cite US GAAP, but you will need to do your own accounting due diligence to be sure you are following the rules.

Your tax treatment may vary depending on current law and or tax versus book basis.

Accounting for this is not murky at all. Don't get lost in the accounting for internal use software.

Example: there is a city that requires a master institutional plan, well you have to spend a couple million to develop it over several years. It's an intangible asset and does get depreciated over its 25 year life, but it is a project developed over time involving lawyers, marketing, engineering, architects, consultants, and all the rest of those costs.

Another one: Trademarks are more similar to what you are doing with the patent. With a trademark there are a lot of annoying small costs that are accumulated over several years, but you want to establish basis for it.

Anything that you use to protect your products from competition can be an asset. The ability to amortize these types of assets will be determined by US GAAP and US Tax law (not sure what the variety of options are, will leave that to your professional team.)

You will need to research treatment.

Remember, you only need to apply GAAP if the issue is material.
Talk with your CPA.

Disclaimer: This post is not "professional tax advice nor is it professional advice to be relied upon", this post is for discussion purposes only and hopefully will help you generate some new ideas as you seek a solution only and is not a substitute for professional advice.

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