What expense category is Patent Filing and Maintenance Fees?

For innovative businesses, a patent is a vital asset that protects an invention and provides a long-term competitive advantage. The process of obtaining and maintaining a patent involves significant costs, including legal fees for the application process and maintenance fees paid to the U.S. Patent and Trademark Office.

A common mistake is treating these costs as a simple, one-time business expense. However, the IRS views the costs of obtaining a patent as part of a larger category of capital expenditures that must be amortized over a period of several years. This guide explains how to correctly classify and deduct these costs in accordance with IRS rules.

Patent Filing and Maintenance Fees Category

The costs you incur to obtain a patent are not a standalone expense category. Instead, IRS Publication 535 classifies them as Research and Experimental Expenditures.

This is because the costs of obtaining a patent, including attorneys' fees for making and perfecting the application, are considered an integral part of the research and development process that led to the invention. As such, these are capital costs that must be amortized over a set period.

Important Considerations When Classifying Patent Costs

The tax treatment for patent-related costs is specific and requires careful classification.

Costs to Obtain a Patent vs. Costs to Acquire a Patent

It is critical to distinguish between creating your own patent and buying one from someone else.

• Obtaining Your Own Patent: The costs to secure a patent for an invention you developed are treated as research and experimental expenditures.
• Acquiring a Patent from Another Party: Publication 535 states that the cost to purchase a patent from another person is not a research and experimental expenditure. Instead, it is the acquisition of a "Section 197 Intangible" and must be amortized over 15 years.

Mandatory Amortization of Research and Experimental Costs

As of tax years beginning after 2021, the rules for research and experimental costs are mandatory. You can no longer elect to deduct these costs in the current year. All such expenditures, including the costs associated with obtaining a patent, must be capitalized and amortized over their useful life.

What Costs Are Included?

The costs that fall under this category include:

• Government filing fees.
• Patent attorney fees for drafting and prosecuting the application.
• Drawing fees for preparing patent illustrations.
• Maintenance fees paid to the patent office to keep the patent in force.

Tax Implications and Reporting

The tax treatment for the costs of obtaining a patent follows the rules for research and experimental expenditures.

The Amortization Period

According to Publication 535, you must amortize these costs relatively over a 5-year period (or 15 years for any expenditures related to foreign research). This amortization period begins at the midpoint of the tax year in which the expenditures were paid or incurred.

How to Report the Deduction

The annual amortization deduction for your patent costs is calculated and reported on Form 4562, Depreciation and Amortization, Part VI. The total amortization deduction from this form is then carried to your main business tax return (e.g., Schedule C).

What Records to Keep

You must maintain meticulous records to substantiate all patent-related costs. This includes:

• Invoices from your patent attorney.
• Receipts for all filing and maintenance fees paid to the patent office.
• Proof of payment for all related services.

How Fyle Can Automate Tracking for Patent Costs

Fyle helps you capture and organize all the legal and administrative costs associated with obtaining and maintaining a patent, ensuring they are properly capitalized and ready for amortization.

• Centralize Legal Invoices: Have your patent attorney email invoices, which can then be directly sent to Fyle for automatic and accurate data capture.
• Track by Invention/Project: Code all costs related to a specific patent application to a single project for clear tracking.
• Create a Clear Audit Trail: Attach all patent office correspondence and legal documents to the expense records in Fyle.
• Automate Your Accounting: Sync capitalized patent costs to the correct intangible asset account in QuickBooks, Xero, NetSuite, or Sage Intacct.