Over the years and certainly recently with the real estate crisis in America, intangible assets have become more important) and don’t forget, that their value as an asset is taxable). Much of what we are speaking of refers to Intellectual Property although there are broader implications. Historically, most intellectual property has been mismanaged and the value of intangible assets are poorly reflected and accounted for on corporate books.
Some may say, “I don’t own any Intellectual Property.” Do you have a respected process, organizational flow to your business or valued employees? Do you own a website? Do you have any written material, trademarks, patents, copyrights or trade secrets? Are you developing new products or literature? If you answered yes, you should read on. If you answered no, you need to consider developing Intellectual Property within your business to bestow value in the future.
What we are referring to is the accounting of the intangible from its inception; this means the cost, the marketing and the expenses in all aspects and stages of development and commerce. Typically, a valuation is needed when there is a merger or acquisition, a sale, a licensing agreement or a loan, which of course leads to the implication for taxation in both profits and losses.
When Intellectual Property is not accounted for properly by GAAP (Generally Accepted Accounting Principles) often the value becomes lost in the above transactions in “good will” meaning the assets pass without valuation and therefore the entrepreneur looses valuable profit that they could have otherwise accumulated. On the brighter side, good will may also have value in the transferring of the asset.
The more developed the Intellectual Property becomes the more relevant it becomes to taxation. When presented on a company’s balance sheet, the IRS is likely to ask, “Are we getting out fair share of taxation from this asset?”
If you own any Intellectual Property, that may scare you. As an entrepreneur, you have probably spent countless hours developing your idea without compensation and now suddenly it might have value that is taxable. You are saying, “What about everything I have put into this!” The answer is accounting and records; you must have them and keep them, forever!
What really becomes scary (if you are not affected by the above) is the fact that there is not one single encompassing formula that you can use to prepare. An analysis requires expertise in law, regulation and legislation, commercial and economic factors and accounting to come to the correct valuation and amortization. This also involves an analysis in the asset’s current state and the futuristic outlook for exploitation. We often speak of proper titling because this is the basis for directing profit and losses and taxation when reporting as well as during the protection, transfer or passing of any of these assets.
The first question for valuation purposes is if the asset is considered Intellectual Property, which means it has legally enforceable rights (such as copyrights and patents) or if it is of intangible value economically or in commerce such as customer relations or trade secrets. Even though an intangible may not have legally enforceable rights, it may have good will value. Consider the value of the following good will in the event of a merger, acquisition or sale of a company.
- the value of skilled employees and organization
- the value of a company that has survived downturns or negative trends
- the value of future growth
When considering the taxation of Intellectual Property and intangible assets, jurisdiction is the first issue. Different jurisdictions have different tax consequences. The broader the jurisdictions (such as multi-state commerce or international business) the more important it is to have the qualified opinion of expert accountants and attorneys. Unfortunately, the answers for taxation are complicated and this is why the trail must be documented.
- Who legally owns the enforceable rights at all times of the assets existence?
- Who has contributed? This means time, money, opinion, knowledge, creation, development and management.
- How is the asset protected?
- What value drives the asset and where does this value driver come from? (Perhaps the value comes from an inventor, a company, another product, a future prediction of growth or the like.)
This documentation gives the tax preparer the information to make the best decision on the taxation, sale or licensing of the asset; without this trail, not only might the value be lost, but the asset may take an unnecessary taxation toll.
Following these steps, though they may sound complicated, they are the basis for the foundation and the protection of the asset. Though they are just the beginning and do not substitute for the protection of the Intellectual Property or intangible asset itself these recordings are the single most import aspect of defense in the event of an attack by a creditor or even a partner.
The last word is that you may have assets you never considered as valuable only because you as an entrepreneur have neglected to value them.