House Ways and Means members endorse ‘patent box' proposal

Tax Hot Topics - House Ways and Means members endorse ‘patent’ box proposalTax writers Rep. Charles Boustany, R-La., and Rep. Richard Neal, D-Mass., have unveiled a bipartisan proposal that would provide a reduced effective tax rate for income derived from intellectual property (IP) held in the United States.

The proposal seemed to immediately win the endorsement of House Ways and Means Committee Chair Paul Ryan, R-Wis., who praised it in a press release and posted a laudatory blog post on the committee website. Ryan is trying to put together an international reform bill that could be paired with an extension of highway funding later this year.

The idea of a reduced rate for IP has gained traction in recent months. It’s meant to encourage the development and retention of IP in the United States and discourage foreign takeovers of U.S. companies for tax purposes. Sens. Chuck Schumer, D-N.Y., and Rob Portman, R-Ohio, agreed on a framework for international reform and a patent box in their report for the Senate Finance Committee Working Group on International Tax, but couldn’t agree on the details.

The Boustany-Neal proposal would generally provide corporations with a 71% deduction for “innovation box profits” derived from qualified IP. The 71% deduction translates to a 10.15% tax rate on qualifying income based on a 35% corporate rate.

Under the proposal, innovation box profits qualifying for the deduction would be calculated by the following:

  • Determining qualified gross receipts derived from the sale, lease or license of qualified IP (Qualified IP is defined broadly to include patents, inventions, formulas, processes, designs, patterns, know-how, computer software, movie or video, as well as property using such IP. It doesn’t include trademarks, brand names, franchises or copyrights.)
  • Subtracting from qualified gross receipts the cost of goods sold, and other expenses and deductions attributable to qualified gross receipts
  • Multiplying this “tentative innovation profit” by the ratio of domestic research and development expenses to all expenses over the past five years

The proposal should be considered something of a discussion draft, and Boustany and Neal are openly asking for feedback from the business community on a number of issues raised by the bill.

Mel Schwarz
+1 202 521 1564

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